Menard, Inc. - Page 50

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                         c.  LTI Compensation Valuation Methodology                   
               Alleging that Dr. Hakala’s valuation method, combining                 
          Black-Scholes, a 50-percent discount for risk aversion, and a 3-            
          year moving average, was “fatally flawed” and “grossly                      
          undervalued” the LTI compensation, petitioners urge us to adopt             
          Mr. Rowley’s valuation methodology.  First, petitioners assert              
          that Black-Scholes is incapable of predicting actual gains with             
          respect to LTI compensation and that it understates the value of            
          stock options by placing a high premium on volatility and                   
          discounting the value of successful companies with sustained                
          growth.  Calling Dr. Hakala’s use of a 50-percent discount for              
          risk aversion “arbitrary”, petitioners claim that this approach             
          fails to differentiate between long-term CEOs and other                     
          executives.  Lastly, petitioners object to Dr. Hakala’s use of a            
          3-year moving average, arguing that it produced a significantly             
          lower value for the LTI compensation by combining “substantially            
          less successful” years with TYE 1998.                                       
               In contrast, respondent asserts that we should adopt Dr.               
          Hakala’s valuation methodology and entirely disregard Mr.                   
          Rowley’s use of the Growth Model.  At trial, Dr. Hakala testified           
          that the Growth Model is not a generally accepted method for                
          valuing stock options and questioned whether any valuation expert           
          would accept Mr. Rowley’s methodology.                                      








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