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Dr. Lacey computed the return on equity for 1995 and 1996
for each of the 12 publicly traded companies by dividing
"recalculated net income" by common equity. Recalculated net
income is net income excluding income from discontinued
operations, minority interests, the writeoff of offering costs,
and special charges. Dr. Lacey calculated that the median return
on equity of the publicly traded companies was a gain of 13.1
percent in 1995 and a gain of 10.5 percent in 1996. In addition,
he calculated that the average return was a gain of 13.6 percent
in 1995 and 9.8 percent in 1996. He calculated that petitioner's
return on equity was a loss of 0.5 percent in 1995 and a gain of
7.8 percent in 1996. Dr. Lacey concluded that petitioner's
return on equity would not satisfy the expectation of reasonable
investors because it was below the median and average returns for
the industry.
In order to assess the fairness of petitioner's division of
earnings, Dr. Lacey examined petitioner's distribution among debt
holders (in the form of interest expense), executive officers (in
the form of bonuses and other compensation), stockholders (in the
form of net income, some of which may be paid out currently as
dividends), and the Government (in the form of taxes). Dr. Lacey
compared petitioner's distribution of its earnings among the four
groups to those made by the 12 publicly traded companies.
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