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other standard methods, nor (3) why Hakala chose to use CAPM in
this instance.
In Estate of Heck v. Commissioner, T.C. Memo. 2002-34, we
commented as follows:
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).
Because the parties have not developed this dispute and we
conclude infra that Hakala’s application of CAPM to petitioner in
the instant case has significant flaws, we do not determine in
the instant case the conceptual suitability of applying CAPM to
the valuation of closely held companies such as petitioner.
The first step in CAPM involves calculating the cost of
equity capital, which Hakala defined as “the expected (or
required) rate of return on the firm’s common stock” that an
investor would “expect to realize from an investment in a company
with the risk and performance characteristics” of petitioner.
Hakala estimated the cost of equity capital to be 15.06 percent
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