Estate of Mary D. Maggos - Page 32

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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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