Estate of James J. Renier, Deceased, Kent L. Renier and Dubuque Bank & Trust Company, Co-Executors - Page 25

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                           e. Inclusion of Interest Expense                           
               Because Mr. Sliwoski used a capitalization rate that                   
          incorporated an assumed cost of debt that a purchaser of                    
          decedent’s interest would incur to effect the purchase, he was              
          required for consistency to add back Renier’s interest expense to           
          his income base, so that normalized income would approximate the            
          investment return available to both equity and debt.  Mr. Kramer            
          used a simpler “return on equity” to formulate the capitalization           
          rate he employed.  As more fully discussed infra, we conclude               
          that the appropriate capitalization rate is a simple return on              
          equity as used by Mr. Kramer, since the interest being valued               
          here is an equity interest.  Accordingly, it is not appropriate             
          to add back Renier’s interest expense when computing expected               
          future income available to equity alone.                                    
                           f. Adjustment for Income Taxes                             
               Both experts account for the effect of income taxes as part            
          of normalizing Renier’s income.  Mr. Sliwoski normalized reported           
          pretax net income and then adjusted for Federal and State income            
          taxes at an assumed combined rate of approximately 38 percent,              
          whereas Mr. Kramer used reported after-tax net income, and then             
          adjusted for income taxes associated with the net impact of the             
          normalizing adjustments using the average of the actual combined            
          Federal and State income taxes paid by Renier over the base                 
          period.  Mr. Sliwoski provided no justification for his assumed             
          rate, while Mr. Kramer’s rate reflected Renier’s historic                   

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Last modified: May 25, 2011