- 41 -
nonoperating assets, whose income would not be included in
Peoples' FCF.
Mr. Fuller forecasted Peoples' FCF for 5 years forward (the
valuation horizon), and computed a terminal value using the
Gordon dividend growth model (Gordon model). The Gordon model is
a model for estimating the terminal value of a going concern,
which assumes that FCF will continue indefinitely and grow at a
constant rate. For purposes of computing the terminal value
under the Gordon model, Mr. Fuller assumed that Peoples' FCF
would continue indefinitely, growing at a rate of 1.5 percent
annually. In forecasting FCF for the valuation horizon and the
terminal value, Mr. Fuller took into account the earnings impact
of removing $12,919,000 from operating assets. Mr. Fuller
assumed that such a reduction would reduce Peoples' net interest
income, rather than loan income, because Peoples could readily
dispose of marketable securities, while its loans had proven to
be unmarketable. Accordingly, Mr. Fuller forecasted Peoples' net
interest income at approximately $1.1 million less than Peoples'
reported net interest income for the calendar year 1992--a
sufficient amount to reflect the loss of an approximately 8-
percent return on the nonoperating assets.
Mr. Fuller estimated Peoples' cost of capital using a
weighted average cost of capital (WACC) formula and calculated
Peoples' cost of equity using the standard capital asset pricing
model (CAPM) formula. The cost of equity was calculated using a
Page: Previous 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 NextLast modified: May 25, 2011