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meant to stay in business and who would therefore have sought
other suppliers of equipment.
The lower likelihood of liquidation affects value in two
ways. First of all, in calculating an asset-based value, we
believe it is improper to use liquidation value, which
understates the value of Dunn Equipment to the hypothetical
buyer.2 Second, even assuming a reduced likelihood of
liquidation, the hypothetical buyer and seller would still
consider asset value to be an important factor in reaching a
price for the shares in question. This is the result of the
disparity in value between the earnings- and asset-based values.
In the face of that disparity, we believe that the earnings value
is too low, primarily because Dunn Equipment was engaged in a
cyclical business, and it was at the low point of the cycle at
the valuation date. The testimony of both of petitioner’s
experts supports this conclusion. They both testified that Dunn
Equipment’s relatively low earnings were not due to poor
management but merely due to the business cycle and the current
climate of competition in the field. Essentially, Dunn Equipment
had to weather a period of low returns in order to maintain
market share, because of the competitive pricing in the equipment
2 On a related point, we also believe that Mr. Frazier’s
approach misconstrued the effects of liquidation. We discuss
this point in greater depth below, in the more detailed
discussion of Mr. Frazier’s calculations.
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