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cashflow), respondent’s expert applied a discount rate to
calculate a present value, as of May 2, 1998, of the estimated
1998-2002 net cashflow.
Respondent’s expert’s discount rate for each year was based
on his estimate of TPC’s cost of equity, calculated under the
capital asset pricing model, and involved the following elements:
(1) A risk-free rate of return of 5.933 percent, equal to
the U.S. government long-term bond rate as of May 2,
1998;
(2) A market-risk premium that varied to reflect the risk
of investing in a private company and the perceived
risks of investing in stocks rather than in long-term
government bonds; and
(3) An estimate of unlevered beta for TPC of 0.60 to
reflect the volatility or level of risk associated with
TPC’s stock as compared to the volatility of the stock
market as a whole (where the market has an overall beta
of 1).11
In his original report, respondent’s expert also calculated
and added to his present value calculations of TPC’s estimated
net cashflow for 1998-2002 a $153,174,000 estimate of TPC’s
residual value, based on a discounted “terminal value” for TPC.
In the words of respondent’s expert, this terminal value
11 The discount rate which respondent’s expert applied to
TPC’s estimated net cashflow for each year is set forth below:
Year Percentage
1998 10.482
1999 9.855
2000 9.497
2001 9.246
2002 9.145
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