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or as part of a going concern. Considering these weaknesses, we
believe that IHC’s value calculated on the basis of its assets is
greater than the $3.6 million postulated by petitioner’s expert
($3.3 million in operating assets, plus $0.3 million cash value
of life insurance).
The usefulness of the market approach is dependent on the
comparables selected and the application of the variable chosen
to the appropriate data. We find that petitioner’s expert’s
calculation of the P/E and price/book value ratios is flawed in
that it does not focus on the period of time close to the
valuation date but uses a median of the 1992 year ranges. Also,
he ignored all high values of these ratios. He used 14.25 as the
median P/E ratio of the comparables, but the exhibit in his
report gives the median as “nm”, or “not meaningful”.
Petitioner’s expert converted the after-tax P/E ratio derived
from the comparables’ P/E ratios to a pretax ratio and then
misapplied the adjusted P/E ratio to various average and weighted
average pretax earnings. In a properly calculated market
comparable approach, the comparables’ P/E ratios are to be
calculated and the selected result to be applied to the subject
company on the same type of earnings; e.g., a P/E ratio
determined on the most recent year’s net earnings is to be
applied to the subject company’s most recent year’s net earnings;
a P/E ratio calculated on 5-year average earnings should be
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