- 34 -
from sources other than the note. Second, Mr. Schroeder
expressly stated that his approach was designed to produce a
“control” value for Demco, rather than a minority value; he
therefore applied a 17-percent minority discount to the present
value of Demco’s future income. Third, Mr. Schroeder’s
determinations of both Demco’s future income and the appropriate
discount rate to apply to that income were quite different from
Ms. Walker’s.
With respect to his estimation of Demco’s future income, Mr.
Schroeder, unlike Ms. Walker, did attempt to predict Demco’s
operating results for 1992-96. Of course, because Demco’s
management had not made any long-term forecasts, Mr. Schroeder’s
predictions, like Ms. Walker’s extrapolations, necessarily were
based to a considerable extent on Demco’s historical operating
results. Nevertheless, Mr. Schroeder did specifically predict
that Demco’s distribution, marketing, and administrative expenses
would decline from their 1991 levels. He also predicted that
management’s forecasted 1992 net income was too high.23
With respect to the appropriate discount rate, Mr. Schroeder
chose a rate of 15 percent for 1992, the first year of his
23 We note that Mr. Schroeder, like Ms. Walker, tax effected
Demco’s future cash-flows by subtracting hypothetical income tax
from Demco’s projected net income (Mr. Schroeder used a 40-
percent rate, while Ms. Walker used a 34-percent rate). We
believe this is likely to result in an undervaluation of Demco
because Demco is an S corporation. See supra note 19.
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