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issued debt is matched to income-earning assets, the issued debt
does not have any intangible value by itself. In his report, Dr.
Hakala explained that “what is of value to a potential buyer is
the potential income stream between mortgages and obligations to
holders of the securities.”
To determine the value of the income spread from the GMCs,
Dr. Hakala used the net management and guarantee income16
petitioner reported for the 6 months that ended June 30, 1985,
and compared that to the average principal balance outstanding
over that same 6-month period. He concluded that the management
and guarantee income totaled $3.5 million. Dr. Hakala assumed
general and administrative costs of 9 basis points annually and
reduced the total value to incorporate the effect of taxes; these
adjustments reduced the net management and guarantee income to
$1.6 million. “Taking into account the actual runoff of each GMC
and discounting to present value the future net spread income at
the weighted average cost of capital results in a value of
approximately $11.4 million for the spread associated with all of
the GMCs.” Dr. Hakala used the same analysis to find that the
present value of the CMOs’ future net spread income at the
weighted average cost of capital equaled $7.2 million.
16 Management and guarantee income is the excess
income/expense during a month from each GMC trust, including the
excess of the effective interest income on mortgages backing the
GMCs over the amount payable to GMC investors and short-term
investments.
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