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conditions. On the basis of IHC’s operating expenses (exclusive
of depreciation), which averaged 7.7 percent of revenues for the
last 5 years and 7.9 percent for the last 3 years, respondent’s
expert forecast operating expenses at 7.8 percent. Depreciation
was forecast at 1.5 percent of revenues. He assumed a 40-percent
tax rate for combined Federal and State income taxes. For
working capital, respondent’s expert selected 5 percent of
revenue, the industry averages being 5 to 7 percent and IHC’s 5-
year average about 5 percent. After a review of historical
results and discussion with management, he projected capital
expenditures to equal depreciation in the long term, at 1.5
percent of revenues. Respondent’s expert developed a discount
rate using a weighted average cost of capital for a capital
structure of 80 percent equity and 20 percent debt, a structure
intended to be reflective of the capital structures of companies
in SIC codes 1541 and 1542; this resulted in a 13-percent
discount rate. The end result of the discounted cash-flow
approach was a value for IHC of $4,800,000, rounded.
Respondent’s expert then averaged the results of the
discounted cash-flow ($4,800,000) and the market comparable
approach ($5,200,000) for a value of $5 million, or $788.65 per
share, on a majority basis. The 30-percent control premium
previously selected by respondent’s expert translates to a
minority discount of 23 percent. Accordingly, on a minority
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