- 25 -
discount this royalty stream back to its net present value on
November 15, 1998.
4. Discount Rate
The single largest source of the disparate valuations
claimed by the parties is the discount rate each applies. When
plugged into a present-value analysis, the rate spread of 19
percentage points yields a difference in valuation of more than
$600,000. Ebanks used a 9% discount rate, which he arrived at by
taking the prime rate as of November 1998 and adding 1%. Ebanks
used this formula for most of his past valuations and believes it
to be an acceptable practice for valuing businesses in the
extraction industry. Moritz reached for a much higher number--
28%. He cited a “sensitivity analysis” of between 24% and 59%, a
range that he said reflected the risk perceived by the market in
developing the Hamblen Road property.
Coming up with such a high discount rate was due to two
fundamental choices that Moritz made. The first was to treat the
relevant cash stream to be discounted as a cash stream from a
mining operation rather than a royalty interest from a mining
operation. As the Commissioner conceded in his brief, the owner
of a royalty interest bears much less risk than does an operator;
that by itself makes a 28% discount much too high. Moritz’s
second choice--to try to derive the discount rate from the
purchase price of two of the properties that he used in his
Page: Previous 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Next
Last modified: November 10, 2007