Estate of Emily F. Klauss - Page 12

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               3.   Other Differences Between the Analyses of Johnson and               
                    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.                                 

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