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Maturity” of “18+”. The next higher ranking, “CCC Bond” and
“Small Cap. Companies” shows a “Yield to Maturity” of “21+”.
Mr. McCoy testified that he chose 19 percent because it fell
within the range of yields to maturity for very small
capitalization companies. He also testified that he checked his
conclusion by building up the required rate of return from
various factors, including an “Expected Small Stock Risk Premium”
of 4.8 percent, the source of which, allegedly, was Stocks,
Bonds, Bills and Inflation: 1992 Yearbook, Ibbotson Associates
Inc. (1992). It is not clear how Mr. McCoy defines "Very Small
Cap. Companies". At trial, Mr. McCoy in fact admitted that G&J
did not fall into the Ibbotson definition of a small company.
We, therefore, have no confidence in the foundation of
Mr. McCoy's analysis on this issue. We are not bound by the
opinion of any expert witness and will accept or reject expert
testimony in the exercise of sound judgment. See Helvering v.
National Grocery Co., 304 U.S. 282, 295 (1938); Estate of Hall v.
Commissioner, 92 T.C. 312, 338 (1989). Petitioners have not met
their burden of demonstrating that an appropriate cost of equity
capital for G&J on the gift date was 19 percent.
We find Dr. Bajaj's testimony to be thorough and convincing.
Dr. Bajaj opined a 14.4-percent weighted average cost of capital
for G&J as of the valuation date. He used the capital asset
pricing model to derive an appropriate cost of equity capital,
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