Estate of Mary D. Maggos - Page 30

                                       - 30 -                                         
          Discounted Cash-Flow Analysis                                               
               In the discounted cash-flow (DCF) analysis, the present                
          value of a company’s projected annual cash-flows over the                   
          forecast period is added to the present value of a company’s                
          residual value and the value of a company’s nonoperating assets             
          to arrive at the present value of a company.  A DCF analysis                
          contains an inherent difficulty when used for a company that has            
          a significant residual value because to determine the present               
          value of a company, the DCF analysis requires an estimate of what           
          a company will be worth at the end of the forecast period                   
          (residual value).  PCAB’s estimated residual value was neither              
          minimal nor easily calculated.  The BVS report assumes that in 10           
          years PCAB will be worth 12.5 times net earnings.                           
               In closely held small companies, the use of a DCF analysis             
          is also suspect when the discount rate is calculated by a                   
          weighted average cost of capital (WACC) determination.  Such                
          determinations often include a determination of the cost of                 
          capital using the “capital asset pricing model” (CAPM).  This               
          Court has recently observed:                                                
                    We do not believe that CAPM and WACC are the                      
               proper analytical tools to value a small, closely held                 
               corporation with little possibility of going public.                   
               CAPM is a financial model intended to explain the                      
               behavior of publicly traded securities that has been                   
               subjected to empirical validation using only historical                
               data of the two largest U.S. stock markets. * * *                      
               [Furman v. Commissioner, T.C. Memo. 1998-157.]                         

Page:  Previous  20  21  22  23  24  25  26  27  28  29  30  31  32  33  34  35  36  37  38  39  Next

Last modified: May 25, 2011