Estate of James J. Renier, Deceased, Kent L. Renier and Dubuque Bank & Trust Company, Co-Executors - Page 11




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               In connection with their respective income approaches to               
          valuation, both Mr. Sliwoski and Mr. Kramer concluded that some             
          of Renier’s assets were not necessary for its core retail                   
          operation.  After excluding the income and expenses associated              
          with these “nonoperating” assets, both experts estimated the                
          value of Renier’s “operating” assets on the valuation date by               
          capitalizing an estimate of Renier’s expected future income.                
          Each expert then added his income-based valuation of Renier’s               
          operating assets to an asset-based estimate of the nonoperating             
          assets to produce a total valuation figure.                                 
               As part of their income capitalization approaches, the                 
          experts agreed that the appropriate starting point for estimating           
          Renier’s expected future income was to take an average of                   
          Renier’s historical reported net income.4  The experts further              
          agreed that it was necessary to make certain adjustments to                 

               4 Although Mr. Sliwoski believed that cash-flow, rather than           
          net income, was the appropriate income base to capitalize, he               
          concluded that net income was an adequate approximation for cash-           
          flow.  In reaching this conclusion, he assumed that Renier’s                
          accounts receivable and inventory levels were sufficient as of              
          the valuation date to sustain probable future growth, that                  
          required equipment additions would equal Renier’s depreciation              
          expense, and that no interest-bearing liabilities, other than               
          short-term liabilities, would be required to finance probable               
          future sales growth.  In addition, as discussed infra, since Mr.            
          Sliwoski used a capitalization rate based on returns to both                
          equity and debt, it was necessary for him to add back Renier’s              
          interest expense to the income base used in his capitalization              
          formula.                                                                    
               Mr. Kramer used net income as his base for capitalization              
          but believed that an adjustment to the capitalization rate was              
          required to account for the fact that he was employing net income           
          rather than cash-flow as his base.                                          




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Last modified: May 25, 2011