Estate of Marcia P. Hoffman, deceased, Elisabeth Hoffman, Personal Representative - Page 35




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               In order to determine the cost of capital, Mr. Mitchell                
          utilized the capital asset pricing model (CAPM).30  In his CAPM             
          analysis, Mr. Mitchell determined a risk-free rate of return and            
          added this to the product of beta31 and a market risk premium.              
          Mr. Mitchell then added an unsystematic risk premium to account             
          for WLI’s status as a small company.  Mr. Mitchell used a 7.5-              
          percent risk-free rate of return based on the market yield of 30-           
          year U.S. Treasury bonds as of the valuation date.  He determined           
          the market risk premium using historical data published in                  
          Stocks, Bonds, Bills and Inflation by Ibbotson Associates.  On              



               30The capital asset pricing model (CAPM) is utilized to                
          estimate a discount rate by adding the risk-free rate, an                   
          adjusted equity risk premium, and a specific risk or unsystematic           
          risk premium.  The company’s debt-free cash-flow is then                    
          multiplied by the discount rate to estimate the total return an             
          investor would require compared to other investments.  See Estate           
          of Klauss v. Commissioner, T.C. Memo. 2000-191 (citing Furman v.            
          Commissioner, T.C. Memo. 1998-157).                                         
               31The application and utility of beta has been described in            
          the following terms:                                                        
               Beta, a measure of systematic risk, is a function of                   
               the relationship between the return on an individual                   
               security and the return on the market as a whole.                      
               Betas of public companies are frequently published, or                 
               can be calculated based on price and earnings data.                    
               Because the calculation of beta requires historical                    
               pricing data, beta cannot be calculated for stock in a                 
               closely held corporation.  The inability to calculate                  
               beta is a significant shortcoming in the use of CAPM to                
               value a closely held corporation; this shortcoming is                  
               most accurately resolved by using the betas of                         
               comparable public companies. * * * [Furman v.                          
               Commissioner, T.C. Memo. 1998-157; citation and fn.                    
               ref. omitted.]                                                         





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