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make the negative-2-percent adjustment on the basis of
petitioner’s conservative capital structure as reflected in its
ample cash reserves and borrowing capacity as defined by Dr.
Sliwoski, low debt-to-equity ratio, and business model to
maintain consistent yearly sales.
Therefore, we hold that an independent investor would find
the following assumed rates of return acceptable:
TYE TYE TYE
Factor June 30, June 30, June 30, 2000
1998 1999
Risk-free rate 6.0% 5.4% 6.8%
Equity risk premium 8.2 8.4 8.5
Size premium 3.3 2.6 4.3
Company specific (2.0) (2.0) (2.0)
risk premium
Assumed rate of 15.5 14.4 17.6
return
The average assumed rate of return for the years in issue was
15.8 percent.
2. Time Period and Calculation
The parties computed the compound growth rates of
petitioner’s shareholders’ equity for 20-year and 10-year
periods. Instead of using compound growth rates to determine
whether an independent investor would be satisfied with the
return on its investment, this Court has generally calculated a
corporation’s ROE by dividing its net income after tax for a
specific year by its shareholders equity. See B & D Foundations,
Inc. v. Commissioner, T.C. Memo. 2001-262 (discussing the ROE
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