- 56 -
Hakala testified that correcting the WACC “caused the
numbers in both years to go up” and stated in his rebuttal report
that “The calculation of the weights for debt and equity in the
BVS report [Hakala’s expert witness report] was inconsistent with
the assumed weights in the original Exhibit IV-2.”
However, we are unable to determine exactly what corrections
Hakala made in his WACC calculations that led to the substantial
increases in his recommendations as to reasonable compensation.
As a result, we do not know whether Hakala has already corrected
for the above-noted errors.
In Sledge’s rebuttal report, he pointed out that the
combined debt and equity multipliers that Hakala used to
determine the cost of debt and the cost of equity exceeded 1.0.
He then proposed debt and equity multipliers that total 1.0, and
he demonstrated the effect of the change by calculating the WACC
for 1995, which he determined was 13.66 percent. Sledge
presented this as follows:
3. This is the weighed [sic] average cost of capital, WACC,
and is calculated as shown below.
Cost of debt 9.50 x (1 -.38) = 5.89
This is the cost of
debt after taxes
Weighed [sic] cost of debt 5.89 x .1170 = 0.69
+ Weighed [sic] cost of equity 15.06 x (1/1 +.1170) =
or, 15.06 x .8953 = 13.48
= WACC 14.16 rounded
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