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forecast; he then increased that rate by 0.5 percentage points
for each of the next 4 years, to arrive at a terminal rate of 17
percent. By contrast, Ms. Walker chose a 22.75-percent rate, as
discussed above.
Mr. Schroeder’s explanation for his choice of rates was not
very clear. Mr. Schroeder claimed that at the time of the gifts
long-term BAA rated corporate bonds were yielding approximately 9
percent. Mr. Schroeder then asserted that because an investment
in Demco was riskier than an investment in BAA bonds, a 6-
percentage point risk premium would be appropriate. However, he
did not explain why this was an appropriate premium.
Mr. Schroeder also attempted to justify his rates by
reference to the Ibbotson data. According to Mr. Schroeder, the
Ibbotson data showed that the average historical return on small
company stocks was 17.5 percent. Mr. Schroeder then asserted
that a lower rate than this would be appropriate for his
analysis, because controlling investors would accept a lower rate
of return than minority investors would; once again, Mr.
Schroeder did not offer any support for this assertion.
Moreover, Mr. Schroeder did not contest Ms. Walker’s observations
that 7.7 percent was an applicable risk-free rate at the time of
the gifts and that small company stocks have historically yielded
12.5 percentage points more than risk-free investments.
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