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comparable to TPC, and they valued TPC as an entity using the
capitalization of income method.
In capitalizing the income of TPC, however, the estate’s
experts significantly downplayed TPC’s long history of
substantial income. They misstated certain financial data,7 and
they opined that TPC’s business would be heavily and adversely
impacted by the Internet and by other advances in technology,
even though the estate’s experts demonstrated no experience with
the Internet- and technology-related companies.
Under the capitalization of income valuation method, a
business is valued based on a projected stream of “normalized” or
sustainable income, capitalized by a risk-adjusted rate of
return. The basic steps involved in the capitalization of income
method are as follows:
(1) A capitalization rate for the business is selected;
(2) The business’s sustainable income is projected;
(3) The capitalization rate is applied to the projected
sustainable income for the business to calculate an
operating value for the business; and
(4) The amount or value of nonoperating assets owned by the
business is added to the operating value of the
business.
7 For example, in their original report, the estate’s
experts stated that TPC’s growth in revenue for years subsequent
to 1994 was flat, contrary to the fact that TPC’s revenue reached
record levels in each of the years 1994-99.
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