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give net asset value the greater significance. Based upon the
foregoing, we find that fair market value is best represented by
an allocation of 65 percent to net asset value and 35 percent to
earnings value.
II. Calculating Earnings- and Asset-Based Value
A. Earnings-Based Value
In his report, Mr. Frazier computed an earnings base and
then divided that figure by a capitalization rate to compute the
present value of Dunn Equipment’s future income stream. None of
the parties or their experts challenges the capitalization rate
of 21.67 percent used by Mr. Frazier, and we accept it. The
dispute turns on whether Mr. Frazier used the proper earnings
base. Mr. Frazier believed that the proper earnings base was net
income, while Ms. Eggleston and Mr. Pratt believed it was net
cash-flow to equity. In general, we agree with Ms. Eggleston and
Mr. Pratt.4
Mr. Frazier’s capitalization rate was based on a study by
Ibbotson Associates, which, according to Mr. Frazier’s report,
gives the average total annual returns for small company stocks
over the return on long-term Government bonds. Thus, we find
that Mr. Frazier’s rate of return is appropriate when considering
4 On the other hand, Mr. Pratt believed that, in the instant
case, Mr. Frazier’s figure for net income adequately represented
net cash-flow and that therefore, ultimately, Mr. Frazier’s use
of net income did not produce erroneous results. We disagree,
for reasons discussed below.
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