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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
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