- 36 -
the basis of this information, Mr. Mitchell concluded that a
market risk premium of 7.2 percent was appropriate. This figure
reflected the average annualized total return on equity
investments in excess of the average annualized bond yield return
on long-term government bonds over the period January 1926 to
December 1993. Mr. Mitchell estimated a beta of 1.032 because he
could not obtain a reliable estimate of beta from comparable
publicly traded stocks. Mr. Mitchell also relied on data from
Ibbotson Associates to determine the additional 5.3-percent
premium for unsystematic risk to account for investment in a
small company stock. Application of the risk percentages and
beta produced a cost of capital of 20 percent. Mr. Mitchell felt
that 3 percent reflected an appropriate rate of growth based on
the inflation rate. To determine the appropriate multiplier, Mr.
Mitchell took 1 and divided it by the cost of capital minus the
growth rate. This yielded a capitalization factor of 1 divided
by .17, or the equivalent of a multiplier of approximately 5.9.
Applying the 5.9 multiplier to the equity cash-flow of $630,000,
and dividing by the number of outstanding shares, 3,480, Mr.
Mitchell concluded that the per share value of WLI was $1,068.
32Beta is calculated by comparing the movement in the
returns of stock against the movement in returns of the stock
market as a whole, which has a beta of 1. A beta of 1 means that
the company and the market are of equal risk; a beta greater than
1 means that the company is riskier than the market. See Smith
v. Commissioner, T.C. Memo. 1999-368.
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