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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.
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