- 25 -
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
Page: Previous 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 NextLast modified: May 25, 2011