- 33 -
deconstructing each expert’s DCF analysis, and assembling our
own, our adopting Dr. Bajaj’s cost of equity capital cannot, in
isolation, be objectionable to respondent, since respondent has
proposed that we find a higher, 16.71-percent cost of equity
capital. Dr. Bajaj relied on the capital asset pricing model
(which takes into account exclusively systematic (or market)
risk) to compute the cost of equity capital, while Dr. Spiro
relied on the so-called buildup method (which pays attention to
the unsystematic (or individual) risk that an investor would face
in investing in Korbel). Neither expert convinced us that his
approach was significantly better (on the facts at hand) than the
other expert’s approach, and we are satisfied that 14.70 percent
(the percentage reached by Dr. Bajaj) is a reasonable figure for
Korbel’s cost of equity capital, and we so find.11 We find that
the WACC is 14.22 percent.
11 In recent cases, we have criticized the use of both the
capital asset pricing model (CAPM) and WACC as analytical tools
in valuing the stock of closely held corporations. See Furman v.
Commissioner, T.C. Memo. 1998-157. See also Estate of Maggos v.
Commissioner, T.C. Memo. 2000-129 and Estate of Hendrickson v.
Commissioner, T.C. Memo. 1999-278, which reaffirm that view,
citing Furman, and Estate of Klauss v. Commissioner, T.C. Memo.
2000-191, where we rejected an expert valuation utilizing CAPM in
favor of one utilizing the buildup method. In other recent
cases, however, we have adopted expert reports which valued
closely held corporations utilizing CAPM to derive an appropriate
cost of equity capital. See BTR Dunlop Holdings, Inc. v.
Commissioner, T.C. Memo. 1999-377; Gross v. Commissioner, T.C.
Memo. 1999-254, affd. 272 F.3d 333 (6th Cir. 2001)
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