- 7 -
($140,666) and an upward adjustment to bring the book value of
the depreciable assets to fair market value ($544,213). He also
subtracted the cash value of insurance ($339,238), to be valued
as a nonoperating asset. These adjustments resulted in an
adjusted book value of $3,323,643 for the operating assets. In
determining the adjustment to the depreciable assets,
petitioner’s expert used information on book values and estimated
fair market values as of April 30, 1993, given to him by IHC’s
chief financial officer. Petitioner’s expert believes the
estimated fair market values were based on quick sale auction
values. He concluded that IHC had no goodwill apart from its
earnings capacity.
Petitioner’s expert next valued IHC using a capitalization
of earnings method. He adjusted IHC’s pretax earnings upwards in
some years and downwards in others to bring Mr. Rakow’s salary in
line with the industry average. Over the fiscal years 1988
through 1992, this adjustment averaged 0.14 percent of revenues,
with a range of -0.5 to 0.5 percent of revenues. He then
selected a capitalization rate, using the market comparable
approach, a buildup approach, and FMI’s experience. For the
market comparable approach, petitioner’s expert chose 14 publicly
traded companies in construction or construction-related
businesses and focused on their price/earnings (P/E) ratios. He
derived each company’s 1992 year range of P/E ratios from
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011