- 22 - of the Clubside promissory notes payable to decedent and Hoffman Associates. Mr. Mitchell determined the value of the notes based on the timing of payments and the rate of return that a holder of the notes would require. To determine a proper return rate, he reviewed: (1) Interest rates of various debt securities; (2) corporate bonds of various ratings; (3) interest rates for conventional mortgages, 30-year and 1-year Treasury securities, and bank prime loans; and (4) venture capital returns. Mr. Mitchell felt that the promissory notes did not possess characteristics of bonds that were in default and highly speculative in nature because the net proceeds from a sale of Clubside’s assets (the Cathead property) would be sufficient to satisfy all debt obligations as of the valuation date. Mr. Mitchell felt that rates ranging from 10-to-15 percent would adequately account for the risk of the promissory notes and concluded that 12.5 percent was the appropriate rate.15 Mr. Mitchell stated that he believed that this rate of return incorporated the lack of marketability of the promissory notes. Mr. Mitchell assumed that the notes would not be paid until the date of maturity; therefore, he applied the 12.5-percent rate of return to the values he assigned the promissory notes as of the 15Mr. Mitchell noted that this rate of return was more than 5 percent above the bank prime loan rate and approximately 2 percent above a B-rated bond, which he explained has vulnerability to default but currently has the capacity to meet interest and principal payments.Page: Previous 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Next
Last modified: May 25, 2011