- 58 -
flow in the base year (to December 31, 1987) of the discounted
cash flow model. The model that Mr. Chaffe used considered a
seven-year period of cash flow of the Company, which Mr. Chaffe
assumed would remain level throughout the discounting period.
Mr. Chaffe adjusted the discount rate because he assumed that
there would be no growth in the cash flow of Marrero Land over
that seven-year period. Mr. Chaffe's discounted cash flow model
further assumed a terminal value equal to the liquidation value
of Marrero Land, which, according to Mr. Chaffe, assured sale of
the real estate held by the Company at its appraised value. The
discount rate that Mr. Chaffe used was the rate of return that an
investor would require to assume the risk of owning stock of the
Company. In determining that discount rate, Mr. Chaffe con-
sidered returns available on other investments as well as an
evaluation of the risk level of Marrero Land and a comparison of
that risk level with market-based returns on equity securities
with similar risks. Mr. Chaffe used a discount rate of 20.2
percent based on the yield on Treasury bonds as of the valuation
date and historical equity premiums.20
20The yield on a seven-year Treasury bond in February 1988
was 8.2 percent (risk free rate). As reported in Ibbotson
Associates 1988 Yearbook (Ibbotson Yearbook), the equity risk
premium based on a broad list of traded equities (S&P 500 Index)
was 8.3 percent. Mr. Chaffe added the small-company stock risk
premium of 3.7 percent, which he also took from the Ibbotson
Yearbook, to the historical risk premium of the Standard & Poor
(continued...)
Page: Previous 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 NextLast modified: May 25, 2011