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the gifts, Demco’s management had only predicted 1 year (1992) of
future results. Ms. Walker stated in her revised report that she
normally would have a 3- to 5-year forecast available when
performing an income-based appraisal.
It is important to note that because Ms. Walker did not have
a long-term forecast, she did not attempt to predict Demco’s
future cash-flows for use in her income-based analysis.
Moreover, because Demco’s historical cash-flow varied greatly
from year to year, Ms. Walker did not use Demco’s historical
cash-flows in her analysis either. Instead, Ms. Walker used
Demco’s historical results to develop what she called Demco’s
“normalized” free cash-flow; she then simply assumed that this
cash-flow would grow 5 percent per year indefinitely after 1992.
More particularly, in her income-based appraisal Ms. Walker:
(1) Examined Demco’s operating results for 1987-91 and its
forecasted results for 1992; (2) used those results to derive
what she called Demco’s “normalized free cash-flow”, or “dividend
paying capacity”; (3) assumed this normalized cash-flow would
continue indefinitely after 1992 and grow 5 percent per year; and
(4) determined the present value of that indefinite cash-flow
using a 22.75-percent capitalization rate.18 As the preceding
18 Ms. Walker described this method as a form of the
“constant growth dividend discount model”. Ms. Walker stated
that she typically used this method when she did not have a long-
(continued...)
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