Estate of Emily F. Klauss - Page 13

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                    b.   Fuller’s Selection of a Beta                                   
               In applying the CAPM method, Fuller chose a beta12 of .7 to              
          estimate Green Light’s systematic risk.  An average amount of                 
          risk is represented by a beta of 1.  A beta of 70 percent would               
          be correct if an investment in Green Light were 30 percent less               
          risky than a composite investment of the Standard & Poor’s 500                
          Stock Composite Index (S&P 500).  We disagree with Fuller’s use               
          of a .7 beta because Green Light was a small, regional company,               
          had customer concentrations, faced litigation and environmental               
          claims, had inadequate insurance, was not publicly traded, and                
          had never paid a dividend.  A beta cannot be correctly calculated             
          for the stock in a closely held corporation; it can only be                   
          correctly estimated on the basis of the betas of comparable                   
          publicly traded companies.  See Estate of Hendrickson v.                      
          Commissioner, supra; Furman v. Commissioner, supra.  Fuller                   
          stated that he selected the beta based on a review of comparable              
          companies.  However, he did not identify these comparable                     
          companies or otherwise give any reason for his use of a .7 beta.              
          We believe Fuller’s use of a .7 beta improperly increased his                 
          estimate of the value of the Green Light stock.                               

               12  Beta is a measure of systematic risk; that is, risk that             
          is unavoidable and that affects the value of all assets.  Beta                
          measures the volatility of a stock’s return as compared to the                
          market as a whole.  See Furman v. Commissioner, supra; Pratt et               
          al., Valuing a Business 166 (3d ed. 1996).                                    

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