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Earnings-Based Value
Mr. Hitt’s approach in determining an earnings-based value
was basically the same as Mr. Egan’s. To estimate earnings for
1993, Mr. Hitt started with a figure of earnings from operations
of $26,537, and assuming a 7-percent growth rate, he calculated
projected earnings for 1993 of $28,395.6 For his capitalization
rate, Mr. Hitt relied on the Capital Asset Pricing Model, under
which, according to him, the capitalization rate is calculated by
adding the risk-free investment rate as of the valuation date
with the product of the risk-free rate and an “equity beta”. The
equity beta is a measurement of the risk of investing in a
specific company in relation to the risk of investing in the
market overall. A beta of 1 means that the company and the
market are equally risky; a beta greater than, or less than, 1
means the specific company is riskier or less risky,
respectively, than the market overall. Mr. Hitt used the rate
for 10-year U.S. Government bonds, 7.2 percent according to him,
as the risk-free rate. His figure for beta was determined from
large publicly traded agribusinesses.7 In addition, he added a
small-company risk premium of an unstated amount. He computed a
6 In contrast, Mr. Egan used a 1993 earnings figure of
$19,435. Mr. Egan’s figure was based on averages of JFI’s
earnings over 5 years, which fluctuated between a low of $9,243
in 1990 and a high of $28,145 in 1992. Mr. Hitt used normalized
earnings from 1992 only in estimating his 1993 earnings figure.
7 He did not state what figure he used for beta.
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