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applied to the subject’s 5-year average earnings. See Zukin,
Financial Valuation: Businesses and Business Interests, par.
2.8[2], at 2-30, par. 6.8[3], at 6-26 (1990). Because we find
the P/E ratios and related computations employed by petitioner’s
expert to be unreliable, we disregard his conclusion that a P/E
ratio between 3 and 5 is appropriate for valuing IHC.1
Petitioner’s expert also developed a capitalization rate
based on the buildup method. To the risk-free rate and equity
premium, he added a small size risk premium and then 5 percent
for other risk factors. Petitioner’s expert describes the other
risks as those factors which differentiate IHC from the public
companies he selected as comparables, factors such as smaller
geographical market, lack of management depth, and lesser access
to capital markets. With the exception of control and
marketability, most of the factors presented by petitioner’s
expert are those which differentiate a small company from a large
one and already were taken into consideration by the small
company premium. If we reduce petitioner’s expert’s
capitalization rate accordingly and follow the remainder of his
methodology, the resulting values are in the range of roughly
1 Petitioner’s expert also asserted that a pretax P/E ratio
ranging from 3 to 5 was consistent with FMI’s experience with
actual transactions, but because no supporting data with respect
to these transactions was provided in his report, we accord
little weight to the assertion.
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