May T. Rakow - Page 20




                                       - 20 -                                         

               of 7.8 percent, rather than the actual 5-year average                  
               of 7.9 percent (for a difference of 0.1 percent); plus                 
                    (iii) the fact that (short-term) interest expense,                
               which actually averaged 0.3 percent for the 5-year                     
               period, is disregarded in a discounted cash-flow                       
               analysis (for a difference of 0.3 percent).                            
          These three factors appear to account for the difference between            
          the 3.1 percent pretax profit margin assumed in respondent’s                
          expert’s discounted cash-flow and IHC’s actual 5-year average               
          pretax profit margin of 2.0 percent.  Thus the maximum adjustment           
          that could have been attributable to excess compensation was 0.1            
          percent (i.e., the difference between the expert’s assumption               
          regarding operating expenses and the actual average), which is              
          within the range that petitioner’s own expert conceded that Mr.             
          Rakow may have been overcompensated.                                        
               This is not to suggest that we believe respondent’s expert’s           
          use of a 3.1-percent assumption for pretax profit margins in the            
          cash-flow analysis is appropriate.  To the contrary, we believe             
          petitioner’s expert’s estimates understate direct costs, with the           
          result that cash-flow, and the indicated value based thereon, are           
          inflated.                                                                   
               As noted above respondent’s expert assumed direct costs at             
          88.0 percent of revenues, notwithstanding the fact that IHC’s 5-            
          year average was 88.7 percent.  In his report, respondent’s                 





Page:  Previous  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  Next

Last modified: May 25, 2011