- 40 -
year and 86.3 percent of its pretax income before payment of
compensation for that year.7
Additionally, Mr. Matthews determined that petitioner, from
its 1992 through 1998 fiscal years, enjoyed a 10.4-percent
compounded annual rate of return on its common stock equity,
adjusted for deferred taxes.8 His computation was as follows:
Common Stock Deferred Adj. CommonCompounded
Equity Taxes Stock Equity Annual Rate Annual Rate
FYE May 31 (millions) (millions) (millions) of Return of Return1
1991 $18.234 $3.701 $14.533 -- --
1992 21.527 4.603 16.924 16.5 16.5
1993 27.114 7.286 19.828 17.2 16.8
1994 25.012 6.912 18.100 (8.7) 7.6
1995 32.062 9.169 22.893 26.5 12.0
1996 44.737 14.560 30.177 31.8 15.7
1997 40.440 12.849 27.591 (8.6) 11.3
1998 43.049 13.970 29.079 5.4 10.4
1999 27.138 7.599 19.539 (32.8) 3.8
1 Computed using a present-value-future-value formula where: Present value
equals $14.533 million (petitioner’s adjusted common stock equity at the beginning of
its 1992 fiscal year); future value equals adjusted common stock equity at the end of
the period in question; and n equals the number of years from June 1, 1991, through
the end of that period.
Mr. Matthews opined that an independent investor would be
satisfied with this 10.4-percent compounded annual rate of
7 Adjusted aggregate compensation of $7.44 million, divided
by net revenue of $10.48 million, equals approximately 71.0
percent; and $7.44 million, divided by pretax income before
payment of aggregate compensation of $8.62 million, equals
approximately 86.3 percent.
8 Petitioner’s 1991 fiscal year annual FOCUS report
reflects preferred stock equity of $1,294,782 as of May 31, 1991.
Petitioner’s 1998 fiscal year annual FOCUS report reflects
preferred stock equity of $1,067,652 as of May 31, 1998. Its
1999 fiscal year annual FOCUS report reflects preferred stock
equity of $1,052,652 as of May 31, 1999.
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