- 45 -
petitioner, as valued by respondent, would require a total
capital investment of at least $89 million. We do not think the
hypothetical buyer should be limited only to a person or entity
that has the means to invest $89 million in Peoples and a
portfolio of nine other securities.
As illustrated by Mr. Fuller's valuation, the selection of
beta is another problem inherent in the application of CAPM to
the valuation of closely held companies. See Furman v.
Commissioner, supra. Beta, a measure of systematic risk, is a
function of the relationship between the return on an individual
security and the return on the market as a whole. See Pratt et
al., supra at 166. The betas of public companies are frequently
published or can be calculated using historical pricing data on
the company's stock. Thus, a beta cannot be calculated for the
stock in a closely held corporation--it can only be estimated
based on the betas of comparable publicly traded companies.
However, because the betas for small corporations tend to be
larger than the betas for larger corporations, it may be
difficult to find suitable comparables when valuing a small,
closely held corporation. See Ibbotson Associates, Stocks,
Bonds, Bills & Inflation, 1993 Yearbook (Ibbotson) at 159;
Copeland et al., Valuation: Measuring & Managing the Value of
Companies 265-266 (2d ed. 1994). In this case, Mr. Fuller used 1
Page: Previous 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 NextLast modified: May 25, 2011