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investigation,13 we find that an appropriate lack of
marketability discount for the gifted shares on the gift date was
25 percent.
3. Cost of Capital
The final significant area of contention between the parties
is the appropriate cost of equity capital to be used for purposes
of valuing the G&J shares. Based on the opinions of their
respective experts, petitioners and respondent assert G&J’s
appropriate cost of equity capital was 19 percent and
15.5 percent, respectively.
It is unclear how Mr. McCoy arrived at 19 percent.
Mr. McCoy begins by stating: “The required rate of return is
determined by comparison to rates of return on investments of
similar risk.” He then ranks various investments by quality, as
of December 1991, beginning with long-term Government bonds and
ending with the category “extreme risk”. One ranking consists of
“CC Bond” and “Very Small Cap. Companies”, which shows “Yield to
13 Both parties criticize the opposing opinion evidence
testimony as being arbitrary and unsupported. Petitioners note
that, at first, Dr. Bajaj, in his report, carefully estimated a
"conservative" lack of marketability discount of 13 percent.
Then, arbitrarily, based on "several additional facts", and with
less than half a page of discussion, he "virtually doubles" his
estimate and concludes that an appropriate discount is
25 percent. Respondent, in turn, notes that the Business
Valuations report relies on studies which examined biased
statistical data, and studies which misinterpret observed
results.
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