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debt. Absent any justification why a hypothetical buyer could
obtain a debt rate less than 2 percent above the Government bond
rate, we see no reason to accept such a low rate as being
appropriate.20 The selection of what we consider to be an
artificially low rate depresses the WACC determination.
The BVS study adopted the CAPM determination as appropriate
for determining the weighted cost of capital. BVS discarded a
constant growth of earnings analysis that yielded an estimate of
18.8 percent because of its “inherent weakness, as compared to
the CAPM methodology”. In noting BVS’s failure to include or
convincingly explain why a small company risk premium should be
excluded from its calculation petitioner’s expert, K. W. McGraw,
testified that an appropriate discount rate would be in the range
of “17 and a half percent, at least”. Having considered all the
evidence before us on this point, we have determined that an
appropriate discount rate would be approximately 17 percent
rather than the 12 percent used in the BVS report or the 22.24-
percent rate used in petitioner’s expert report prepared by
Willamette Management Associates.21
20The 10.5-percent rate appears to be based on the
assumption that a hypothetical buyer would obtain Baa-rated debt
financing; however, insufficient justification for this
assumption has been provided.
21See discussion of the Willamette Management Associates
report infra pp. 41-42.
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