Estate of Helen J. Smith, Deceased, Frederic L. Foill II and Cassandra F. Vallery, Co-Executors - Page 26




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          dividends.  First, Mr. Hitt assumed that an amount of excess                
          capital, $2,938,280, would be paid out in year 1.  Next, he                 
          assumed that FNBW would maintain a capital-to-asset ratio of 8              
          percent and calculated the minimum equity required to maintain              
          that ratio.  Finally, he assumed that the yearly income would be            
          used in two ways:  Part of it would become retained earnings in             
          order to maintain the 8-percent capital-to-asset ratio; the                 
          remainder would be distributed to the shareholders.  The amount             
          distributed to shareholders was then discounted to present value            
          using a capitalization rate of 14.7 percent.                                
               As with JFI, Mr. Hitt used the Capital Asset Pricing Model             
          to calculate the capitalization rate.  His figure for beta, 1.05,           
          was determined from averages of small publicly traded regional              
          banks.  To calculate the capitalization rate, he began with the             
          rate for U.S. Government bonds as of the valuation date, which,             
          according to him, was 7.2 percent, and he added the product of              
          the beta of 1.05 times 7.2 percent, for a total of 14.7                     
          percent.15  This capitalization rate already took into account              
          any minority interest discount, so a further such discount was              
          not applied.  Mr. Hitt considered adjusting this rate to a higher           
          number to reflect the greater risk associated with FNBW’s lack of           
          geographic diversification; but he felt that this factor was                



               15 Although 7.2 + (1.05 x 7.2) = 14.76, Mr. Hitt rounded the           
          figure to 14.7.                                                             





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