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expert states that the 88.0-percent figure chosen was “based upon
historical results, industry averages, and anticipated economic
conditions”. Yet historical results averaged 88.7 percent, and
the industry average, according to the report, was 90.2 percent.
If the assumed direct costs percentage is affected by the
industry average, it should go up in IHC’s case, not down. We
find that respondent’s expert’s own data support an assumption of
a direct costs percentage higher than 88.0 percent. If one were
to take the average of the most recent 3-year and 5-year average
direct costs (just as respondent’s expert did with respect to his
operating expenses assumption), the result would be a direct
costs assumption of 88.6, rather than 88.0, percent.
We believe the record in this case supports the use of a
higher direct costs percentage, which more closely approximates
the historical averages experienced by IHC, than the one employed
by respondent’s expert. If one substitutes a direct costs
percentage of 88.6 percent into respondent’s expert’s discounted
cash-flow analysis, the indicated value for IHC as a whole
becomes approximately $3.8 million, rather than the $4.8 million
calculated by respondent’s expert.
As recalculated, the $3.8 million value indicated by a
discounted cash-flow analysis calls into question the other
valuation approach employed by respondent’s expert; namely, the
market comparable approach. That approach indicated a value of
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