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book Quantifying Marketability Discounts (1997), to arrive at a
valuation of $108,436 for each of petitioners’ separate
transfers. According to Mr. Mercer, an appraiser using the QMDM
model is able to quantify the impact of the factors that
influence marketability discounts in real-life settings. See id.
at 209.
As described by Mr. Mercer, an appraiser first values the
shareholder’s investment at the entity level, resulting in a
valuation of the investment as if it were marketable. See id. at
171-184. In his book, Mr. Mercer generally arrives at the entity
level valuation using the capitalization of earnings method,
which considers current earnings per share, an anticipated
earnings growth, and an appropriate discount rate accounting for
the inherent risk with regard to investing in a particular
company. See id. The net amount of the discount rate less the
anticipated earnings growth is referred to as the capitalization
rate, which is multiplied against the earnings per share. See
id. After that computation is made, the appraiser has generated
the marketable value of 1 share in the investment. See id. Mr.
Mercer then suggests that the appraiser adjust the value of the
stock upward for a control premium or downward for a minority
interest. See id.
After the value of the marketable investment at the entity
level is computed, the appraiser applies the QMDM model to
account for the fact that the growth in the value of the
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