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B. Analysis of the Experts’ Application of the Discounted
Cashflow Method
1. Introduction
Recently, in Estate of True v. Commissioner, T.C. Memo.
2001-167, we described the DCF method as follows:
The discounted cash-flow method is an income
approach based on the premise that the subject
company’s market value is measured by the present value
of future economic income it expects to realize for the
benefit of its owners. This approach analyzes the
subject company’s revenue growth, expenses, and capital
structure, as well as the industry in which it
operates. The subject company’s future cash-flows are
estimated, and the present value of those cash-flows is
determined based on an appropriate risk-adjusted rate
of return.
Drs. Bajaj and Spiro are in agreement as to the elements of
the DCF valuation method: The discounted present value of
cashflow projections for Korbel over a 5-year (1995-1999) period,
plus Korbel’s residual value at the end of the fifth year (also
discounted back to present value), plus the value of nonoperating
assets, less long-term debt, and less appropriate discounts,
e.g., for lack of marketability. They disagree, however,
regarding the computation of almost every element, including
projected revenues, operating costs, capital expenditures, the
rate of return to be incorporated into the discount factor, the
nature and amount of the nonoperating assets, the amount of long-
term debt, and the nature and amount of the discounts. We find
neither of the experts totally persuasive. We accept, however,
portions of the testimony of each. We shall discuss and evaluate
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