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Renier at 24.76 percent, quite close to Mr. Kramer’s estimate of
24.90 percent. Mr. Sliwoski then reduced this required rate of
return by 6 percent to account for Renier’s estimated growth
after the valuation date.17 Mr. Sliwoski also believed that the
capitalization rate should reflect a “weighted average cost of
capital”; that is, a blending of the rate of return on equity
with the cost of debt incurred in a hypothetical purchase, which
rate he estimated would be 2 percent above prime, or 8.45
percent, on the valuation date. Mr. Sliwoski further computed an
after-tax cost of the debt by discounting it 38 percent. Using
the assumption that a purchase of decedent’s interest would be
financed 65.5 percent with debt and 34.5 percent with equity, Mr.
Sliwoski computed the weighted average cost of capital as
follows:
Weighted Average Cost of Capital Per Mr. Sliwoski
Before Tax After Tax
Percentage of Cost of Cost of
Financing Financing Financing Income Tax Financing
Component Component Component Adjustment Component
Debt 65.5% 8.45% 62.0% 3.43%
Equity 34.5% 18.76% NA 6.47%
Total 9.90%
or
approximately
10%
Thus, the effect of Mr. Sliwoski’s weighted average is to reduce
the capitalization rate from 18.76 percent (24.76 percent
17 Mr. Kramer also believed that Renier’s estimated growth
rate should reduce its capitalization rate.
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