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Respondent defends AE’s conclusion that a lack of
marketability discount of 20 percent is correct. Petitioner
agrees with MPI that a lack of marketability discount of 40
percent is correct. We disagree with petitioner.
MPI compiled information from Private Equity Week, a weekly
newsletter, on comparable private placements in recent years and
found that the mean discount for lack of marketability for
restricted stock like DGA’s before 1990 was 34.2 percent, from
1990 to 1997 was 20.7 percent, and from 1997 to the present has
been 13 percent. MPI used the 34.2-percent discount and adjusted
it to 40 percent because DGA stock had no prospect of becoming
public in more than 2 years. We believe MPI should have used the
discount studies from the period that includes the transactions
at issue. The valuation dates are in 1999 and 2000 when,
according to MPI, the median lack of marketability discount rate
was 13 percent. We conclude that a 20-percent discount for lack
of marketability is appropriate.
6. Conclusion as to Fair Market Value of DGA Stock
We calculated the fair market value of DGA stock as
follows:17
17 This computation is based on AE’s capitalization of
income approach adjusted for executive compensation. Earnings
before interest and tax (EBIT) are adjusted by $1,300 for 1999
and $1,100 for 2000 to correct the adjustment for executive
compensation. Each amount (other than percentages and number of
shares) in this calculation is multiplied by one thousand.
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