- 43 -
Using the 14.3-percent discount rate he calculated under
CAPM, Mr. Fuller calculated discounted present values of
$3,480,000 and $4,660,000 for Peoples' FCF for the valuation
horizon, and its terminal value, respectively, for a value from
operations of $8,140,000. He then added back the book value of
the nonoperating assets, net of a 10-percent minority discount,
to arrive at a total equity value of $19,770,000 ($6,590 per
share).
There are significant shortcomings in Mr. Fuller’s
application of CAPM in this case that highlight our doubts over
the appropriateness of its application to the valuation of small,
closely held companies. As we said recently, "CAPM is a
financial model intended to explain the behavior of publicly
traded securities", and we "do not believe that CAPM and WACC are
the proper analytical tools to value a small, closely held
corporation with little possibility of going public." Furman v.
Commissioner, T.C. Memo. 1998-157, 75 T.C.M. (CCH) 2206, 2214,
1998 T.C.M. (RIA) par. 98,157, at 868-98. Unlike the market
contemplated by CAPM, the market for Peoples stock, to the extent
one even exists, is not efficient, liquid, or free of significant
transaction costs. Moreover, in relation to other closely held
corporations, the liquidity of a financial institution is even
further reduced by the fact that acquisitions and dispositions of
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