- 28 -
Ms. Walker developed her capitalization rate in part by
reference to two sources: (1) The 1991 yield on long-term
Treasury securities, as set forth in the report of respondent’s
expert; and (2) the rates of return on publicly traded stocks
(the Ibbotson data) as set forth in Ibbotson Associates, Stocks,
Bonds, Bills, & Inflation, 1992 Yearbook.
As Ms. Walker correctly noted, respondent’s expert stated in
his report that in December 1991, the rate of return on a risk-
free investment (long-term Treasury securities) was 7.7
percent.20 According to Ms. Walker, the Ibbotson data revealed
that historically, the annual return on the Standard & Poors 500
Composite Common Stock Index (S & P 500) was 7.4 percentage
points higher than a risk-free return; it also revealed that the
annual return on stocks of smaller companies was 5.1 percentage
points higher than the overall S & P 500 return.
Ms. Walker was of the opinion that because Demco was
significantly smaller than the average small public company,
investors would demand an additional risk premium of 2.55
percentage points (one-half the 5.1 percentage point additional
return on small company stocks) on any investment in Demco stock.
20 We note that in her original report Ms. Walker stated
that at the end of 1991, the yield on 30-year Treasury bonds was
only 7.39 percent; she also stated that this yield was expected
to be 7.30 percent in June 1992 and 7.49 percent at the end of
1992.
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