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ii. Valuation of JM and Specialty Preferred Stock
Mr. Browning determined the values of the preferred stocks
of JM and Specialty in the following manner. He divided the
annual dividend rate by a market dividend yield rate that he felt
was consistent with the risk and return characteristics of the
preferred stock. Mr. Browning then multiplied this figure by the
number of preferred shares outstanding. Finally, he applied a
marketability and liquidity discount. JM’s annual dividend rate
was 8 percent. To determine an appropriate market dividend yield
rate, Mr. Browning looked at two companies, City of Paris and
Emporium Capwell Co., and concluded that 8 percent was the
appropriate market dividend yield rate. Using the formula
described above, Mr. Browning determined an aggregate JM
preferred stock value of $72,717 (8 percent divided by 8 percent,
multiplied by 72,717 outstanding preferred shares). Mr. Browning
applied a 5-percent discount for lack of marketability and
liquidity, resulting in a value of $69,081 for the JM preferred
stock or $.95 per share.
Mr. Browning determined the value of the preferred stock of
Specialty by taking the preferred stock’s par value and applying
discounts for marketability and liquidity, and minority interest
considerations. Mr. Browning did not include the dividend rates
in his calculations because no dividends were ever paid prior to
1951, and the dividends were noncumulative without preferred
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