- 7 -
The experts each used the income capitalization3 and market
or public guideline company4 methods to estimate the value of
decedent’s Green Light stock. Johnson and Fuller used the same
guideline companies: Scotts Co. (Scotts), American Vanguard
Corp. (American Vanguard), Lesco, Inc. (Lesco), and Vigoro Corp.
(Vigoro). Johnson and Fuller primarily disagree as to: (1)
Whether to apply a small-stock premium and (2) whether to adjust
the multiple for the growth rates of Green Light and the
guideline companies.
B. Stock Value Before Considering Discounts
1. The Small-Stock Premium
Johnson applied a small-stock premium of 5.2 percent in
calculating the discount rate5 he used to approximate the return
required by investors in the smallest quintile of the public
stock market. Respondent contends that Johnson was incorrect in
applying a small-stock premium. We disagree.
3 The income capitalization method is used to estimate the
fair market value of income-producing property by considering the
present value of the future stream of income to be produced by
that property. See Estate of Bennett v. Commissioner, T.C. Memo.
1989-681, affd. 935 F.2d 1285 (4th Cir. 1991).
4 The market or public guideline company method compares
the company being valued with similar, publicly traded (i.e.,
"guideline") companies.
5 The discount rate is the total of the risk-free rate, the
equity risk premium, the small-stock premium, and the specific
risk premium.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Next
Last modified: May 25, 2011