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year covenant had a value of $2 million. Instead, we believe
that the value of the 8-year covenant was less, and the value of
the redeemed stock was much greater than the amounts determined
by Mr. Heebink.
Guideline Companies Analysis
Mr. Engstrom also relied upon a guideline companies analysis
based on comparisons with publicly traded stocks. He determined
that the fair market value of HII stock was $29,197,000 on a
minority, marketable basis. After applying a marketability
discount of 25 percent, Mr. Engstrom determined the fair market
value of HII stock to be $21.9 million, or $219,000 per share.
He gave a significant amount of weight, 40 percent, to the value
resulting from the guideline companies analysis.
In his guideline companies analysis, Mr. Engstrom relied
solely on price/earnings ratios (P/E ratio(s)) to compare HII to
the guideline companies.34 Petitioners argue that Mr. Engstrom’s
use of P/E ratios to compare HII to the guideline companies was
erroneous. They claim that P/E ratios are a “crude measure” for
calculating value and do not consider important differences in
interest levels, tax levels, and depreciation levels between the
subject company (HII) and the guideline companies. Petitioners
34Mr. Engstrom determined the P/E ratios from Value Line
Investment Survey, a publication that does not provide
information for other measures of performance such as EBIT
(earnings before interest and taxes) and EBITDA (earnings before
interest, taxes, depreciation, and amortization).
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