- 12 -
3. Other Differences Between the Analyses of Johnson and
Fuller
a. Fuller’s Use of the CAPM Method
Fuller calculated his discount rate using the capital asset
pricing model (CAPM).10 In contrast, Johnson used a discount
rate based on the build-up method.11 We believe that Fuller
should not have used the CAPM in this case. Green Light should
not be valued by using the CAPM method because Johnson and Fuller
agreed that it had little possibility of going public. See
Estate of Maggos v. Commissioner, T.C. Memo. 2000-129; Estate of
Hendrickson v. Commissioner, T.C. Memo. 1999-278; Furman v.
Commissioner, T.C. Memo. 1998-157.
10 The capital asset pricing model (CAPM) is used to
estimate a discount rate by adding the risk-free rate, an
adjusted equity risk premium, and a specific risk or unsystematic
risk premium. The company’s debt-free cash-flow is then
multiplied by the discount rate to estimate the total return an
investor would demand compared to other investments. See Furman
v. Commissioner, T.C. Memo. 1998-157.
11 Under the build-up method, an appraiser selects an
interest rate based on the interest rate paid on governmental
obligations and increases that rate to compensate the investor
for the disadvantages of the proposed investment. See Estate of
English v. Commissioner, T.C. Memo. 1985-549.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Next
Last modified: May 25, 2011