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By adding $112,551 in adjustments to Renier’s after-tax net
income for the base period of $579,367, we arrive at normalized
income for the period of $691,918. By dividing this figure by
the 69.33 months in the base period and multiplying the result by
12, we calculate Renier’s expected future annual income available
to equity at $119,761.
2. Calculating the Capitalization Rate
The experts reached widely divergent conclusions regarding
the appropriate rate to use in capitalizing Renier’s expected
future income. Mr. Sliwoski concluded that the rate should be 10
percent, whereas Mr. Kramer set it at 22 percent. The principal
source of this difference concerns whether the capitalization
rate should be computed based on the return on equity that a
hypothetical buyer would require (Mr. Kramer’s view) or should
consist of a weighted average of the return on equity as well as
the return on an assumed amount of debt that a hypothetical buyer
would incur to acquire decedent’s interest in Renier (Mr.
Sliwoski’s view). In addition, the experts disagreed regarding
the estimate of the rate of growth in Renier’s future earnings
that should be factored into the computation of the
capitalization rate.
a. Weighted Average Cost of Capital or Return
on Equity
Mr. Sliwoski estimated the return on equity that a
hypothetical buyer would require in calculating a value for
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