- 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’sPage: 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