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After discussing the 12.9-percent median industry return,
Mr. Dorman switched to a customized approach to derive a
capitalization rate. He started with a 6.14-percent rate of
return on 5-year U.S. Treasury bonds as a riskless rate. He then
added to the 6.14-percent base, increases of 7.9 percent, 5.78
percent, and 3 percent for “Premium for Equity”, “Premium for
Small Stock”, and “Company/industry”, respectively. Those
increases are generally explained as excess of return of common
stock over bonds; excess of return of small capitalization
companies over stock exchange common stock; and finally an
increased risk factor based on either industry or company
conditions.
The add-ons to the 6.14-percent return for a riskless
investment increased the capitalization rate to 22.85 percent,
which Mr. Dorman reduced by 5.5 percent to account for Godfrey’s
growth, finally arriving at a 17.5-percent capitalization rate
(rounded to the nearest 0.5 percent). Using the 17.5-percent
rate and his $1,846,793 annualized earnings computation, Mr.
Dorman’s analyses result in a capitalized value for Godfrey of
$10,553,101, which is almost $7 million or 40 percent less than
Godfrey’s net assets or ostensible liquidation value.
Ultimately, Mr. Dorman discarded the income approach and
concluded that Godfrey had a fair market value of $17,341,379, on
the basis of his net asset approach. Mr. Dorman also applied a
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