Estate of Mary D. Maggos - Page 31

                                       - 31 -                                         
          The BVS report uses a WACC determination including a CAPM                   
          determination in arriving at an appropriate discount rate.  In              
          making the CAPM determination, BVS assigned a beta19 of 0.76 as             
          compared to the market’s normal rate of 1.0.  This resulted in a            
          determination of the cost of equity capital being 14.2 percent in           
          the CAPM computation.  We are not persuaded that the guideline              
          companies used in the BVS report to determine beta in this case             
          were appropriate.  None of the companies selected were shown to             
          have had operations that were substantially similar to PCAB.  Nor           
          are we persuaded that PCAB should be assigned a smaller beta than           
          the guideline companies assuming that they were appropriate.  If            
          a beta of 1.0 were assigned, volatility equal to market, the cost           
          of equity capital would have been 16 percent rather than the 14.2           
          percent used in the BVS study.  We are also unpersuaded that the            
          BVS study selected an appropriate rate for debt in the WACC                 
          determination.  BVS selected 10.5 percent as the pretax cost of             

               19Beta, a measure of systematic risk, is a function of the             
               relationship between the return on an individual                       
               security and the return on the market as a whole.                      
               Pratt et al. * * * [Valuing a Business (3d ed. 1996)] *                
               * * at 166.  Betas of public companies are frequently                  
               published, or can be calculated based on price and                     
               earnings data.  Because the calculation of beta                        
               requires historical pricing data, beta can not be                      
               calculated for stock in a closely held corporation.                    
               The inability to calculate beta is a significant                       
               shortcoming in the use of CAPM to value a closely held                 
               corporation; this shortcoming is most accurately                       
               resolved by using the betas of comparable public                       
               companies. * * *  [Furman v. Commissioner, T.C. Memo.                  
               1998-157; fn. ref. omitted.]                                           

Page:  Previous  21  22  23  24  25  26  27  28  29  30  31  32  33  34  35  36  37  38  39  40  Next

Last modified: May 25, 2011