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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.]
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