- 8 -
was close to or equal to zero, indicating to Mr. Egan that the
companies he chose were valued, for the most part, on the basis
of assets rather than on the basis of earnings, cash-flow, or
dividends. Considering all relevant factors, Mr. Egan believed
that decedent’s shares of stock in JFI would sell at a discount
from net asset value less than the discount for the comparable
companies, so he chose a discount of 50 percent. Thus, for his
final step, Mr. Egan applied the discount of 50 percent to a
figure for net asset value for JFI of $1,063,610, for an asset-
based value of $532,000.
Earnings Value
Mr. Egan’s approach was to calculate the present value of
JFI’s future earnings stream by developing an estimate of future
earnings, to which he applied a capitalization rate in order to
discount future earnings back to present value. The
capitalization rate employed was equal to the rate of return
that, in Mr. Egan’s opinion, an investor would require before
deciding to invest in JFI.1
To estimate the future earnings of JFI, Mr. Egan began with
average annual earnings of JFI for the 5 years previous to 1993
in the amount of $18,111. He also calculated a 5-year weighted
1 In general, the inherent risk in an investment is directly
proportional to the required rate of return from the investment.
Thus, the riskier the investment, the higher the rate of return
required by the investor.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011