- 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
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