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Therefore, on the basis of the Ibbotson data and her opinion, Ms.
Walker concluded that an appropriate capitalization rate for
Demco was 22.75 percent, calculated as follows: (1) A 7.7-
percent risk-free rate; plus (2) a 7.4-percent equity-risk
premium; plus (3) a 5.1-percent small company risk premium; and
plus (4) an additional 2.55-percent premium to reflect Demco’s
exceptionally small size.
Taking her normalized free cash-flow of $720,317, and
capitalizing this at a net rate of 17.75 percent (i.e., 22.75
percent capitalization rate, less 5-percent assumed growth rate),
Ms. Walker concluded that under her income-based method the value
of Demco’s equity would be $4,058,124.
Ms. Walker also concluded in her revised report, as she had
in her original report, that a 40-percent lack-of-marketability
discount and a 5-percent nonvoting discount should be applied.
After applying these discounts, the value of the nonvoting Demco
common stock on the date of the gifts, under Ms. Walker’s income-
based analysis, was $175.24 per share.
Conclusion of Ms. Walker’s Revised Report
Ms. Walker’s original report concluded that the fair market
value of the Demco nonvoting common stock, as of the date of the
gifts, was $211.20 per share. As noted, under Ms. Walker’s
income-based analysis the stock’s value was $175.24 per share.
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