Full opinion text
MEMORANDUM-OPINION FLANNERY, District Judge. I. Introduction On June 23, 1997, this Court granted Plaintiffs’ motion for summary judgment on the issue of liability, finding that Defendant Islamic Republic of Iran (“Iran”), acting through its co-defendants, had expropriated Plaintiff McKesson’s 31% interest in an Iranian dairy company, the Sherkat Sahami Labaniat Pasteurize Pak (“Pak Dairy”), in April of 1982. See McKesson Corp. v. Islamic Republic of Iran, Civ. A. 82-220, 1997 WL 361177 at *12 (D.D.C. June 23, 1997). This Court further held as a matter of law that Iran had wrongfully withheld from McKesson the payment of dividends declared by Pak Dairy in 1981 and 1982 (hereinafter the “1981 dividend” and “1982 dividend” respectively) and that Iran could be held liable in federal court for the expropriation and failure to pay dividends under the Treaty of Amity and customary international law. Id., Mem. Op. at 24-31, 1997 WL 361177 at *12-*15; see Treaty of Amity, Economic Relations, and Consular Rights Between the United States of America and Iran, 8 U.S.T. 899 (1957). Between January 18 and February 17, 2000, a bench trial was held to determine the appropriate amount of damages. Iran was the ■ only defendant appearing at trial. In their case-in-chief, Plaintiffs first presented the testimony of Fred A. Loichinger (“Loichinger”), Chief Engineer of Pak Dairy from 1976 to 1978, and Robert C. Carpenter (“Carpenter”), a financial investment analyst and foreign investment manager for McKesson during the relevant period. Both testified regarding the condition of Pak Dairy up to 1978 and certain proposed expansions of its business. Plaintiffs also read into the record certain portions of the deposition of Alireza Dadyar (“Dadyar”), the then-Senior Accountant of Pak Dairy and in 1982 its Deputy Chief Accountant. As their fourth fact witness, Plaintiffs put on Leonard A. Patterson (“Patterson”), McKes-son’s Associate General Counsel, who testified chiefly regarding the value of McKesson’s dividends for the years 1981 and 1982. Finally, Plaintiffs put on an appraisal expert, Robert Reilly (“Reilly”), to offer an expert opinion on the value of McKesson’s equity interest in Pak Dairy at the time of the expropriation. In Iran’s case-in-chief, it put on Dadyar as a fact witness to testify to the condition of Pak Dairy in the early 1980s, Dr. Gho-lam H. Vafai (“Vafai”) as an expert on Iranian law to authenticate certain Iranian legal documents and Anatole Richman (“Richman”) as an appraisal expert offering a contrary view of the value of McKes-son’s interest in Pak Dairy in April of 1982. In Plaintiffs’ rebuttal case, Reilly gave further testimony. Plaintiffs also put on Professor Shaul Bakhash (“Bakhash”) as an expert on Iranian history to testify to the absence of bombing in Tehran in 1981 and 1982. On March 16, 2000, the parties made their closing arguments. Now, upon reviewing the testimony and exhibits in evidence, as well as the relevant law, the Court enters the following findings of fact and conclusions of law in accordance with Fed.R.Civ.P. 52(a). In making its findings and conclusions, the Court bears in mind that the burden of proving the amount of damages is upon the Plaintiffs. See Samaritan Inns, Inc. v. District of Columbia, 114 F.3d 1227, 1235 (D.C.Cir.1997); Gould v. U.S., 160 F.3d 1194, 1197 (8th Cir.1998); Aeronca, Inc. v. Style-Crafters, Inc., 546 F.2d 1094, 1096 (4th Cir.1976). II. Findings of Fact A. The Plaintiffs The Plaintiffs include four United States corporations which hold formal title to the expropriated shares in Pak Dairy: McKes-son HBOC, Inc. and three wholly owned subsidiaries, Foremost Tehran, Inc., Foremost Shir, Inc. and Foremost Iran Corp. When this litigation commenced, McKes-son HBOC, Inc. was named Foremost McKesson, Inc. It changed its name to McKesson Corporation on July 27, 1983 following the sale of all of its dairy interests around the world. In January of 1999, it adopted its current name. McKes-son’s total equity interest in Pak Dairy is 31%, with 10% held by each of the three subsidiaries and 1% held by McKesson HBOC, Inc. The remaining co-plaintiff is the Overseas Private Investment Corporation (“OPIC”), an agency of the United States which insures private overseas investments of United States nationals. See 22 U.S.C. § 2191. OPIC had insured McKesson’s interests in Pak Dairy and seeks to recover monies paid in settlement of McKes-son’s insurance claim. B. Iran Throughout the 1960s and for most of the 1970s, Iran was governed by Mohammad Reza Pahlavi (“the Shah”). However, political turmoil began in the last half of 1978 with labor strikes and general unrest and culminated later that year in the Iranian Revolution (“Revolution”). In December of 1978, the Shah left the country and in February of 1979, a new government was formed based on the rule of Islamic law and following a far more socialist approach to regulating the economy than the previous regime had taken. Most dramatically, the new government nationalized a number of industries such as oil, gas, railways, fisheries, metal, shipping, aircraft and automobiles. While it did not nationalize the dairy industry, it maintained strict price controls over dairy products and also controlled the distribution of raw dairy materials including milk and butter. For example, all foreign imports of raw butter were obtained directly by the government, which then redistributed allotments of butter to the various dairy companies. In addition, Iran set up new labor laws, which inter alia established Worker’s Islamic Councils. A Council for a particular company was elected by the company’s employees and had an ambiguous role to play in influencing corporate policies and decisions regarding working conditions and pay. All of these new laws and policies were in place by the middle of 1979, and continued to apply through April of 1982. In November of 1979, Americans at the United States Embassy in Tehran were taken hostage and shortly thereafter, Iran was subjected to an international trading embargo. However, after the release of the hostages in January of 1981, most nations lifted the economic embargo, the notable exception being the United States. All the economic data in 1981-82 indicates a relatively quick return to normalization of international trade. In particular, Japan, West Germany and Holland engaged in substantial trade with Iran. However, Iran’s international trade overall was still lower in 1982 than it had been prior to the Revolution. On September 22, 1980, Iraq commenced a war against Iran (the “Iran-Iraq war”) by a surprise attack on Iran’s southwestern border. Initially, Iraq was successful, seizing Iranian territory along the border that included several important oil fields. During 1981, the war was largely or solely fought in Iranian territory. However, around the start of 1982, the tide turned and Iraqi ground forces were driven from much of the territory they had occupied, including the oil fields. Iraqi retreat from Iran was substantially complete by April of 1982. On the first day of the war, Iraq bombed several military bases and airfields in Iran, including the Tehran Marahab Airport which was situated on property adjacent to Pak Dairy. In October, Iraq bombed several oil refineries. The bombing campaign proved, however, to be a failure overall. Several bombs did not go off; others missed their targets. The Tehran Airport specifically suffered slight damage to its runway, which was repaired quickly. After these early attacks, bombing in Iran was minimal. There was no bombing of Tehran at all in 1981 or 1982. However, sorties and bombing runs were made on cities a few hundred miles to the southwest (i.e. near the border between Iran and Iraq where the ground fighting was taking place). Further, Iraqi jets were occasionally seen making flights over Tehran. Inflation was a serious problem for Iran both before and after the Revolution, running about 20% between 1977 and 1982. In the dairy industry specifically, inflation rates were 14% in 1978, 15% in 1979, 18% in 1980 and 24% in 1981. High inflation prior to the Revolution was a result primarily of excessive growth in certain sectors of the economy and an imbalance between supply and demand. After the Revolution, it continued in part due to the embargo and the Iran-Iraq war. C. Pak Dairy In 1959, a group of private Iranian citizens asked McKesson, a Maryland corporation (then operating under the name ForemosNMcKesson, Inc.), to join them in establishing, a dairy business in Tehran, Iran. McKesson agreed to provide half of the required capital, all management and personnel, procurement services, ingredients and packaging. A joint venture agreement was executed and, through a separate agreement, McKesson agreed to provide technical assistance, licensed its trademark and provided procurement and engineering capability. Pak Dairy was incorporated and formally registered as an Iranian private joint stock company on March 12, 1960. From 1960 until 1979, McKesson provided the company’s top management. Until October 1981, McKesson representatives sat on the Board of Directors of Pak Dairy. Although McKesson initially owned a 50% interest in the company, by 1978 it had reduced that interest to 31 percent. Frank Fisher (“Fisher”) was the managing director of Pak Dairy from shortly after its founding until November of 1979, when he left Iran to return permanently to the United States. As managing director, Fisher had performed duties equivalent to a chief executive officer of a corporation. In October of 1980, Mohamad Khabiri (“Khabiri”) was elected Managing Director by the Board and held the position through the date of expropriation. Pak Dairy’s operations occurred at two plants located in Tehran: a main dairy plant at Old Karaj Road on land immediately adjacent to the Tehran Airport, and an ice cream production plant known as Canada Frost approximately a quarter mile away. Principle products at the main facility included fluid milk in white, chocolate and strawberry flavors, a heavy breakfast cream, butter, yogurt and cottage cheese. At the ice cream facility, Pak Dairy made a variety of ice cream products in various flavors. Pak Dairy did not produce its own raw milk or raw butter. The company obtained 17% of its daily supply of fresh milk from a dairy herd company called Sepa-han, in which Pak Dairy had approximately a 20% ownership interest. The remainder came from contracts with government-run dairies. Pak Dairy purchased butter in frozen blocks on the international market. Because storage room at the plant was insufficient to contain all of its frozen butter, Pak Dairy stored most of its supply in cold storage warehouses downtown and would bring a block to the main dairy plant as needed for processing and repackaging into butter packs wrapped in foil. As with butter, the foil and other packaging materials were also purchased on the international market. Between the two plants, Pak Dairy was capable by 1978 of producing 175 tons of milk, 60 tons of butter and 60 tons of ice cream per day. By the end of 1966, Pak Dairy’s operations were profitable and remained so every year thereafter through 1982. D. Procedural History McKesson commenced the instant action on January 22, 1982 alleging that Iran, acting through its agents, had inter alia illegally withheld dividends issued by Pak Dairy in 1979 and 1980 and that as a result of this and other interferences with its property rights, McKesson’s equity interest had been effectively expropriated as of May 27, 1980. Pursuant to Executive Order No. 12294, 46 Fed.Reg. 14111 (1981), this Court stayed the action pending an adjudication of McKesson’s claims by the Iran-U.S. Claims Tribunal (“the Tribunal”) in The Hague. On April 10, 1986, the Tribunal issued a ruling. See Foremosty-Tehran, Inc. v. Government of the Islamic Republic of Iran, Award No. 220-37/231-1 (filed April 11, 1986), reprinted at 10 Iran-U.S. Cl. Trib. Rep. 229 (1987). It found that the 1979 and 1980 dividends had been illegally withheld from McKesson and that Iran was responsible for the nonpayment. Id. at 252. It therefore ordered Iran to pay McKesson an amount equal to the dollar value of the two dividends plus interest. Id. However, the Tribunal also found that Iran’s “creeping” interference with McKesson’s property rights did not, by January 19, 1981, ripen into the sort of “irreversible deprivation” of property which amounts to a de facto expropriation. Id. at 249-50. Because a claim must have been “outstanding” on January 19, 1981 to fall within the Tribunal’s jurisdiction, see Foremost-McKesson, Inc. v. Iran, 905 F.2d 438, 441 (D.C.Cir.1990); Foremost Tehran, Inc., 10 Iran-U.S. Cl. Trib. Rep. at 233 n. 5, the Tribunal did not consider whether the property was expropriated subsequent to that date. Plaintiffs then revived this action on April 1, 1988 by filing a motion for partial summary judgment on liability, alleging that Iran’s conduct subsequent to January 19, 1981 when viewed in addition to Iran’s earlier conduct did constitute a legal expropriation after the Tribunal’s jurisdictional cut-off date. The Court subsequently found as a matter of law that Iran had illegally -withheld from McKesson its share of the dividends issued in April of 1981 and 1982, and that by April 1982, Iran’s interference with McKesson’s property rights amounted to an expropriation. E. Summary of the opposing valuations of McKesson’s equity interest in Pak Dairy Both Plaintiffs and Iran put on a valuation expert who testified as to the fair market value of McKesson’s 31% interest in Pak Dairy at the time of the taking. The experts defined “fair market value” somewhat differently, however. Iran’s expert, Richman, viewed the relevant fair market value as that price which would be paid for the 31% interest by a willing buyer to a willing seller. Plaintiffs’ expert, Reilly, testified that he calculated the value as the price between a willing buyer and a less-than-willing seller. For all aspects of their calculations save one, the application of a lack of marketability discount (see below), this distinction did not make a difference in the methods by which each calculated value. Plaintiffs’ valuation expert, Reilly, used two methods of valuation: (1) the discounted cash flow (“DCF”) method and (2) the direct capitalization (“DCAP”) method. Both methods measured the value of Pak Dairy as a going concern by converting a projection of future income into an equivalent April 1982 present value. However, the DCAP method projects income only one year into the future based on a historical annual income average and assumes that the company will have steady growth rate in perpetuity. The DCF method forecasts income a number of years into the future based on factors or assumptions that may not reflect historical patterns and does not assume that each future year will have the same amount of growth. For each method, Reilly made two calculations of value. In one calculation, he adjusted the value of the company upward to account for the potential income of certain Pak Dairy projects (hereinafter the “New Projects”) which had been planned but not yet fully implemented by the valuation date. In the second calculation, Reilly determined the value of the company ignoring any potential income from the New Projects. Using the DCF method, he calculated the value of Pak Dairy with the New Projects to be $88.4 million. Using the DCAP method, he calculated the value of Pak Dairy with the New Projects to be $68.4 million. Because he found these two methods equally reliable, he concluded that the value of the entire company with the New Projects was the average of these two figures, $78.4 million, and that the value of McKesson’s 31% interest was $24.3 million. He then calculated the value of Pak Dairy without the New Projects using both methods. Using the DCF method, he calculated the value to be $56.2 million. Using the DCAP method, he calculated the value to be $55.7 million. Again averaging the two values, he concluded that the value of Pak Dairy without the New Projects was $55.95 million, and that McKesson’s 31% interest was equal to $17.4 million. Richman rejected the DCF method as overly speculative, and applied only the DCAP method. He found that no adjustment should be made for the potential income of the New Projects. Using the DCAP method, he determined the value of Pak Dairy to be $7,302,835. He then applied a 10% lack of marketability discount, and took a further discount of 35% for McKesson’s minority status. His final valuation of McKesson’s 31% interest was approximately $1.3 million. In contrast, Reilly took no lack of marketability discount, testifying that one was not appropriate in a forced-sale situation. He also took no minority discount, testifying that his valuation was already performed on a minority basis. B.oth Plaintiffs and Iran introduced evidence in support of their respective valuations which was only available after the valuation date. However, under the “known or knowable” rule, a retrospective appraisal (where the effective date of the appraisal is prior to the date of the appraisal report) should be based on information which would have been known or knowable by an investor at that time. The sole appropriate use of information available only after the valuation date would be to establish by inference the existence of a fact that would be known to an investor prior to that date. Accordingly, in connection with the valuation of Pak Dairy, the Court considers only the facts that would be known or knowable by April of 1982. Overall, the Court finds that of the two experts, Reilly was more qualified and experienced. Although both experts had spent years engaging in valuations of small companies, Reilly had a superior background in valuing corporations in foreign countries in general and Iran in particular. Richman stated that he had never performed a valuation analysis on a foreign corporation, let alone one in Iran. Reilly by comparison has valued numerous international business, and in particular had valued six to eight companies in Iran that had been expropriated, testifying six times before the Tribunal in support of his opinions. Richman’s general knowledge of Iran stemmed from a relatively brief list of sources, compared with the “banker’s boxes” of Iranian data with which Reilly was familiar. Nevertheless, the Court finds that Richman was a competent appraiser whose opinions deserve to be weighed carefully against Reilly’s in light of all the evidence. F. Direct Capitalization Method The DCAP method is one of the income-based methods of valuation, which are used to value a company as a going concern by converting a projection of the company’s future profits into an equivalent equity value. Both experts relied on this method to value Pak Dairy. Under the DCAP method, the valuator first calculates the historical average annual cash flow over a period of years approximating one business cycle and then, based on that average and the company’s long term growth rate, projects income one year into the future. This projected or “normalized” income is what will be converted into equity value or “capitalized.” The projected income is obtained by multiplying the average historical net cash flow by (1 + G) where G is the estimated long term growth rate of the company. The value of the company is then equal to the projected income divided by the “capitalization rate.” The capitalization rate in turn is equal to the “present value discount rate” minus the long term growth rate. In sum, the overall DCAP formula is as follows: Where C = Historical Average Annual Net Cash Flow G = Long Term Growth Rate D = Present Value Discount Rate The key factors to be determined are thus the long term growth rate, the average historical net cash flow, and the present value discount rate. 1. Long Term Growth Rate The long term growth rate is that rate of growth expected to continue in perpetuity. Reilly estimated the long term growth rate to be twenty (20) percent. In highly significant contrast, Rich-man estimated the growth rate to be zero (0) percent. In arriving at a growth rate of 20%, Reilly estimated the long term growth in real value at 15% and, because he calculated his other values with inflation built in, added 5% to account for expected growth in prices due to inflation. The Court finds that the 5% inflationary component of growth is appropriate but that the prediction of 15% long term real growth is excessive. Reilly based his prediction of real growth primarily on two factors: first, a 1978 report, prepared by Carpenter based on projections provided by Pak Dairy’s management, forecasting 15% growth in sales of Pak Dairy’s existing products each year from 1978 through 1982; second, a substantial increase in population subsequent to the 1978 projection. The 1978 report prepared by Carpenter in turn made its projections based on a number of factors. First, in the preceding relatively low-inflation years, Pak Dairy had experienced steady and very significant growth in product sales, from approximately $13 million in 1973 to $31 million in 1976. Further, trends within the dairy market in Iran indicated that this growth would continue. The report also predicted continuing economic growth in Iran’s economy overall based in part on a combination of political stability, favorable government attitude towards private enterprise, a favorable environment for foreign investment and an expectation of government growth-oriented expenditures in its next five-year economic plan (the Sixth plan adopted by the Shah). All of these assumptions soon turned out to be incorrect, as the Iranian Revolution took place shortly after Carpenter issued his report, leading to an Islamic regime with strong socialist characteristics and a hostility to Western culture, management style and investment. The Sixth Plan was of course never adopted, and the Iran-Iraq war, another unforeseen development, added to the economic disruption and the drain on Iran’s resources. However, although the impact of these unforeseen events was dramatic in 1980, the effect had significantly although not entirely diminished by April of 1982. For example, contrary to Carpenter’s prediction, total gross domestic product for Iran dropped considerably between 1979 and 1981. However, this loss was almost entirely due to the drop in oil revenues that resulted from Iraq’s seizure of Iran’s south-western oil fields early in the Iran-Iraq war. By April of 1982, Iraq had been largely, pushed out of Iran and Iran’s oil fields had been reclaimed. The effect of Iran’s battle victories was noted in a March 1982 report by the Tehran Stock Exchange: The beginning of the year 1982 coincided with the brilliant victory of the Iranian army in the war fronts against the aggressor, Iraq, which, in itself, paved the way for reconstruction and revival of the country’s economy. The increase of the public confidence in the banking system, the considerable growth of the private sector’s savings with the banking system and rapid increase of oil export during this year, were amongst the significant consequences of these victories. Pl.Ex. 51 at IR670 (emphasis added). This turnaround, coming after the end of the international trade embargo in early 1981 and the return of substantial amounts of foreign trade thereafter supports the conclusion that, as of 1982, real growth in Iran’s economy could be reasonably expected notwithstanding the new socialist regime and the ongoing war. Indeed, the agricultural sector, which is the sector in which Pak Dairy operated, not only grew every year between 1977 through 1981 notwithstanding the war and the new regime but had its highest rate of growth in 1981. Further, in that year, new investment in most forms of business rose from $18,152,000 in 1980-81 to $29,728,000 in 1981-82, a real increase in investment of roughly 30 percent. Thus, as of April of 1982, real growth could reasonably be expected in the economy overall and the agricultural sector in particular. As with Iran as a whole, Pak Dairy faced difficulties which Carpenter had not foreseen. The war with Iraq, while not inflicting any direct damage on Pak Dairy’s operations, nevertheless impacted on it in several ways. In 1981, Pak Dairy had made a substantial financial contribution to the war effort. It also contributed food, refrigerated trucks (used in the war for the purposes of transporting the dead), payments to the relatives of martyrs and payments to employees serving in the military for the difference between their military salary and their civilian salary. In addition, the war caused labor shortages, resulting in a decrease in Pak Dairy’s workers from 743 in December of 1980 to 707 by the end of 1981. Given that the war was ongoing in April of 1982, it is reasonable to expect that Pak Dairy would continue to provide some form of resource for the war-effort and be limited in its ability to obtain new labor. However, as the trend in the war in April of 1982 was dramatically in Iran’s favor, a reasonable investor would expect such collateral expenses from the war to decrease in the future. Pak Dairy’s problems also included shortages of raw materials such as liquid milk, butter and spare parts and an unde-rutilization of capacity due to these shortages. Supply of raw milk was a critical problem for Pak Dairy, as the amount declined in 1981 from around 120 tons per day to only 75 tons per day, less than half the company’s production capacity. This reduction followed a threat in 1980 from the Iran Milk Industries Company (“IMIC”), an Iranian instrumentality responsible for the payment of government milk subsidies. IMIC warned Pak Dairy to reduce its milk purchases to no more than 100 tons or else forfeit milk subsidies for any milk over that amount. IMIC indicated that the reduction was necessary because of a general shortage and the need to equitably distribute the available supply. However, in light of the fact that total milk production in Iran rose in both 1980 and 1981, and considering the Board’s confidence in early 1982 that they would receive a “fair” distribution of this supply by the beginning of 1983, it is reasonable to expect that Pak Daily’s allotted supply of milk would grow. The Managing Director actually predicted in February of 1982 that the company would later in the year be able to obtain raw materials necessary to maximize production, and Dadyar testified that milk supply in 1982 had already risen to 80 tons per day, a 7% increase over 1981. In addition to the increasing milk supply, shortages in other areas were also being addressed. The Board of Directors noted on April 4, 1982 that it had succeeded in obtaining 25 million rials worth of spare parts for its production machines. The Court finds that as of the valuation date, a reasonable investor would conclude that Pak Dairy’s supply shortage problems would continue to improve after the valuation date. Price controls imposed by the government represented another hindrance to new growth, as they constrained Pak Dairy’s ability to respond to rising costs. Carpenter noted that such controls operating before the Revolution “had seriously reduced business profits and created a significant uncertainty in business circles.” Pl.Ex. 4 at MC 8628. He predicted that the new government put in place by the Shah in 1976 would begin modifying the price control policy to allow reasonable price increases and generally speaking take a more favorable approach to business. This prediction proved unreliable after the Shah’s “new government” was removed and replaced by an Islamic regime which maintained strict price controls during the high-inflation years after the Revolution. Although Pak Dairy had success in those days in obtaining permission to increase prices as needed, it is likely that the effects which Carpenter noted in 1978, which he assumed would diminish under a more business-favorable regime, would at least continue under the socialist post-Revolution regime. However, the price control system existed before the Revolution, yet from 1973 to 1977, Pak Dairy’s sales grew at a compound growth rate of 22.1% a year. The overall impact of these problems can best been judged by Pak Dairy’s actual revenue results in 1980 and 1981. Although in 1980, Pak Dairy’s revenues dropped more than 65% from the previous year before adjusting for inflation, the company returned in 1981 to its historic pattern of real growth. Overall, its net profit before taxes increased from 134 million rials in 1980 to 178 million rials, roughly 33% or approximately 9% after adjusting for inflation in the dairy market. This improvement could reasonably be expected to continue in 1982 because of the improvements in both the Iranian economy and the dairy industry and because of reasonably expected increases in supplies. The population statistics relied upon by Mr. Reilly add further support to the conclusion that Pak Dairy would continue to experience real growth after April 1982. In Iran overall, population significantly expanded every year between 1976 and 1982, from 33.7 million in 1977 to 40.8 million in 1982, a 21% overall increase. The rate of increase was even higher in Tehran because the Iranian Revolution precipitated an acceleration of migration from rural to urban areas. Between 1978 and 1980, the population of downtown Tehran alone (ignoring the suburbs of Tehran) increased from 4 million to 6 million, a fifty percent increase in population in three years or less. That was particularly significant for Pak Dairy because Tehran was its principle market and Pak Dairy controlled about a third of the milk market in that city. There is a strong correlation generally between population and the consumption of dairy products. The correlation would be particular strong here for two reasons. First, the population increase was disproportionately made up of younger persons, ranging from zero to ten years, when persons are drinking more milk than at later years. Second, the Middle-eastern diet involved consumption of dairy products to a greater degree than the American diet. Although this correlation had not appeared by 1982 due to other factors such as limitation of supply, it supports the conclusion that as supply and the overall economy improved, growth would closely follow. It also provides an additional reason to believe that the Iranian government would take steps to improve milk supply, given the increased demand and the Iranian government’s concern on ensuring that the basic needs of its people would be met. The government’s expressed position that increasing the production of dairy products was one of its “top priorities” was noted by the Board in early 1982. Viewing the existing external difficulties of Pak Dairy, many stemming from either the socialist character of the Iranian government and the ongoing war with Iraq, as well as the specific difficulties of Pak Dairy and taking into account the positive developments both in Iran and the company specifically, the Court finds that the record supports a long term real growth forecast of 10% and that the overall long term growth rate, including a component for inflation, is therefore 15 percent. 2. Net Cash Floto In calculating average net cash flow, a valuator looks to the actual historical annual profits of the company. However, the valuator must also be satisfied that the historical cash flow is representative of future cash flow and if it is not representative, adjustments to the historical numbers must be made. For example, where historical net income is reduced by unexpected and non-recurring expenses, adding back those expenses to income is appropriate in calculating an accurate and representative average net cash flow. As an appropriate historical period approximating one business cycle, both experts in this case looked at Pak Dairy’s net cash flow during the five-year period 1977-1981. To determine cash flow for each of these years, both experts looked to the company’s audited financial statements. However, they disagreed regarding three aspects of the calculation. First, they disagreed slightly on the foreign exchange rate to apply to the figures in the financial statements. Second, they differed in whether to calculate net cash flow on a pre-tax or after-tax basis. Reilly calculated the average net cash flow on a pre-tax basis, whereas Richman calculated the after-tax average. Finally, in Reilly’s calculation, he found that adjustments to the historical cash flow were appropriate, because of non-recurring expenses and because the historical income did not reflect the profit-earning potential of the New Projects. Richman found that no adjustments should be made. a. Official Exchange Rates The figures in the audited financial statements were in rials, the Iranian currency. In calculating their historical average net cash flow, both experts converted the figures in the financial statements to U.S. dollars at the official exchange rate. However, they determined that rate using different sources. Richman used the official exchange rates as published by Bank Markazi, the Central Bank of Iran while Reilly converted the figures to U.S. dollars using the rial-to-dollar exchange rates published by the World Bank. The World Bank’s publication of exchange rates for Iranian rials is based on a calculation of the average exchange rate used by Iran in its actual transactions with foreign entities using the International Monetary Fund (“IMF”) as a clearinghouse. Because the World Bank published rate is the actual exchange rate that Iran used when it conducted business through the IMF, the Court accepts it as appropriate and sufficient evidence of the Iranian official exchange rate. As published by the World Bank, the average official exchange rate was 70.58 rials to the dollar (“rtd”) in 1977; 70.48 rtd in 1978; 71.5 rtd in 1979; 71.57 rtd in 1980; 80.03 rtd in 1981; and 84.45 rtd in 1982. k b. Calculation Pre-Tax or After-Tax Reilly testified that calculation of net cash flow could be made either on a pretax or after-tax basis, so long as all the factors in the DCAP formula were calculated on a consistent (pre-tax or after-tax) basis. Thus, he testified, if a pre-tax normalized income (the numerator in the DCAP formula) is divided by a pre-tax capitalization rate (the denominator), the resulting value is the same as it would be if both numerator and denominator were calculated on an after-tax basis. Reilly-testified that he did in fact calculate the factors in both numerator and denominator on a consistent pre-tax basis. Richman testified that he calculated net cash flow on an after-tax basis in part because it was required by the data source on which he relied to calculate his present value discount rate. Richman read an excerpt from this source, the 1999 Ibbotson Report, which suggests that its equity data (whose specific role in the present value discount rate is discussed in greater detail below) are calculated on an after-tax basis and should only be used on after-tax cash flows. However, although Reilly also relied in his valuation on data from an Ibbot-son study, the specific study was Ibbot-son’s 1981 Yearbook, not the 1999 Report. Further, in requiring after-tax cash flow for an after-tax rate of return data, Ibbot-son implicitly acknowledged the alternative of using a pre-tax cash flow for a pre-tax premium. The Court finds that Reilly appropriately calculated net cash flow on a pre-tax basis. c. Adjustments Without making any adjustment for the New Projects, Reilly determined that the average net pre-tax cash flow between 1977 and 1981 was $2,967,000. In calculating this average, Reilly adjusted the 1981 net income figure by adding back a single non-recurring expense, a $500,000 voluntary contribution to the war effort. The Court finds that the contribution was appropriately treated as a non-recurring expense and therefore accepts $2,967,000 as the average annual net pre-tax cash flow without taking the potential income of the New Projects into account. Reilly testified that the income figures for years 1979 through 1981 should also be adjusted to reflect the earning potential of three New Projects. Specifically, he added $320,000 to the net income for 1979, $1,116,000 to 1980 and $1,734,000 to 1981. Taken together, these further adjustments due to the New Projects increased Reilly’s calculated average historical net income by $634,000. These adjustments were based on projections of income from the New Projects made by Carpenter in 1978. Carpenter had joined McKesson in 1964 as a financial analyst and in this capacity, he worked with approximately 25 overseas companies in which McKesson had an equity interest and routinely reviewed their financial statements and audit reports. Beginning in 1973 or 1974, Carpenter was the planning manager for McKesson’s overseas investments, which required him to analyze new opportunities to invest in business overseas and to increase the profitability of then existing operations. While employed by McKesson, Carpenter visited Pak Dairy between 15 and 20 times, with his first visit in 1970 and the last in 1978. Each time he was in Iran, Carpenter attended Pak Dairy Board of Director meetings if they were in session and he attended Pak Dairy Board of Directors meetings held at the McKesson offices in San Francisco, California once each year until 1979. As a result of his job responsibilities for McKesson, Carpenter worked closely with Pak Dairy management to develop an overall financial program based on their production capability, sales capabilities and financial requirements and to develop presentations based on their data. Before the Revolution, Carpenter helped develop an expansion plan involving an outlay by Pak Dairy of $7.4 million for three projects. Four million dollars was allocated for a project to commence the production and sale of infant food. Two million dollars was proposed for an increase in Pak Dairy’s cold storage facilities, which would enable it to store frozen butter on-site. The increased on-site storage space would enable Pak Dairy to perform more efficiently by eliminating the need to transport butter from the storage space rented downtown. Finally, Carpenter proposed $1.4 million for a third project, a further investment in Sepahan to increase the size of its dairy herd and thus increase the amount of raw milk available to Pak Dairy. In 1978, Carpenter submitted a proposal to McKesson that it invest $1.24 million-as its share of the cost of these New Projects. The proposal made specific income projections for the first three years for the infant food project and for all three projects together. Projections were based on the information obtained from Pak Dairy’s financial records and sales and on earning projections from the sales manager and managing director. Subsequently, McKes-son approved the $1.24 million expenditure. The largest of the three projects was the infant food project, which involved a plan to produce, sell and distribute two forms of baby food, an infant milk formula and a cereal formula, the base of which was dried milk powder. At the time of the proposal, there was no current in-country production of either product. ■ Among those importing baby food was Gervais-Danone of France (“Gervais”), which held approximately 28% of the baby food market. The Gervais product had an estab-. lished distribution system through local pharmacies and was accepted by consumers as a quality brand name. Prior to June of 1978, Pak Dairy negotiated an agreement with Gervais to produce baby food under the Gervais product name and through its distribution system. The agreement was for an initial period of 10 years with automatic renewal periods of 5 yéars. To add this product to Pak Dairy’s line and begin production and sales, a number of significant steps were required. By the date of expropriation, following a discussion of the merits of the Project by Pak Dairy’s board of directors, Pak Dairy had in fact taken most of the necessary steps. The principal piece of equipment Pak Dairy needed was a “spray dryer,” which turned'liquid milk into dry milk, the principal ingredient in the infant food formula. By the end of 1978, a spray dryer had been purchased for approximately $1,000,000 from a United States company arid installed at the main Pak Dairy facility and was fully operational. In addition, after making a preliminary feasibility study, Pak Dairy constructed a factory for producing the infant food in the northern section of its main plaint at a cost of 25 million rials (roughly $800,000 at official excharige rates). ■ A government license was also required to produce the new product. Prior to the Revolution, Pak Dairy applied for and obtained a license from Iran which gave them the exclusive right to produce baby food under an existing import label. Other imports of baby food would be restricted so long as Pak Dairy met the local demand. By December of 1978, the only thing Pak Dairy needed to begin actual production and distribution of baby food was packaging equipment, which cost only $35,000 and was commercially available on the market in Europe. However, implementation of the baby food project was halted during the international embargo. In response to the lifting of the embargo in 1981, and at the direction of the Board, Pak Dairy management renewed consideration of whether to begin infant food production. In August of 1981, the Managing Director stated in a report to the Board: since some of the problems have been resolved and there is a possibility for the implementation of the plan for production of children’s food and there is a need in the country for such products for the children, and in order to avoid the company’s loss due to previous investment in this project, the board of directors is requested to provide its opinion as to whether we should contact Dipal Company and re-visit the possibility of implementing and completing such plan. PLEx. 12. In response, the Board was still hopeful of implementing the project, and intended to do so after the submission of another “feasibility study” to the Ministry of Industries and Mines and receipt of its opinion. By April of 1982, Pak Dairy had not made a final decision to begin infant food production. Pak Dairy had also at that time not made the additional investment in Sepa-han, nor had it built a new cold storage facility. It had identified a piece of land referred to as the Tanker land, which was situated immediately adjacent to the Pak Dairy main factory and could serve as a site for new storage. Further, in April of 1981, the Board of Directors approved the purchase of the land in principle for this purpose. However, the land’s owner rejected certain terms of the offer. Around May 16, 1981, the Managing Director had revised the offer and submitted a new request to the Board of Directors, but the Board had not re-approved the purchase by April of 1982. The Court concludes that neither the proposed storage facility nor the possibility of an increased supply of milk resulting from the proposed Sepahan investment support any adjustment to income. However, based on the substantial investment that had been made in the baby food project, the relatively small investment that was needed to complete the project, the exclusive license obtained from the government, the distribution agreement and the accompanying access to an established label and system of distribution, the problems that had reportedly been solved, the statements of the Managing Director and the Board pursuing an interest in the project up to the time of valuation, the recognized need and demand for the infant food product and the specific baby food income projections made by knowledgeable employees at Pak Dairy in 1978, the Court finds that an investor would consider the potential income of the infant food project to be a valuable intangible asset. Simply put, a reasonable investor would value the company with the potential described above more highly than the same company without such potential. The Court also finds that the 1978 projections of income are a reasonable starting point for estimating an appropriate adjustment to income to reflect the value of the baby food potential. However, 1978 specific income projections cannot be considered representative of the value of potential income absent a substantial discount. First, only 91% of the income projections were based on the baby food project. Nine percent of the income adjustment is thus deducted for this reason. The resulting baby food income must be further discounted significantly to account for its uncertainty. The 1978 projections were based on a number of assumptions that proved by 1982 to be highly inaccurate. The projects could not be assumed to be as successful under the new regime and in the context of war as they would be otherwise, particularly considering that in April of 1982, Pak Dairy was suffering limitations on its supply of liquid milk, the necessary raw material for the production of dry milk used in making baby food. Further, in 1982, there was still some doubt as to whether the baby food project could be implemented at all, although this doubt was small for the reasons discussed above. In light of these problems and uncertainties, the Court finds it appropriate to discount the 1978 baby food projections by 80 percent. Accordingly, instead of an adjustment of $634,000, the Court finds that the average net cash flow should be adjusted upwards by $115,388. Given that the average net income without the infant food potential is $2,967,000, the net cash flow to be normalized is thus $3,082,388. S. Present Value Discount Rate The present value discount rate is the overall rate of return on capital that would be demanded by an investor, or the “cost of capital.” Because the measure of income Reilly used in his cash flow calculations was Pak Dairy’s income before debt service, Reilly’s discount rate had to reflect the average rate of return for equity and debt. He therefore appropriately calculated both a rate of return for equity and a rate of return for debt and then calculated the weighted average rate of return to obtain his final present value discount rate. Both experts calculated the equity rate of return using what is known as the buildup method, which first establishes a “risk-free” rate of return and then adds to that rate to take into account various sources of risk. These additional sources include the long-term equity risk (the added risk of equities over bonds), the small-stock equity risk (the additional risk of investing in small companies over large companies), and the company and country specific risk, (which address risk specific to Pak Dairy and Iran). a. Risk Free Rate The “risk-free” rates used by the two experts were close, but not identical. Reilly used a 10% rate based on the rate of return for Iranian long-term bonds in the Iranian year 1358 (March 1979 to March 1980). Richman used a 10.95% rate based on long term U.S. Treasury bonds. The “risk-free” rate of return is generally set at the rate of return on long term government bonds in the country where the business is located. Reilly chose the rate for a five-year Iranian bond. Although these long-term bonds were not literally risk-free, they are appropriately used as the basis of the “risk-free” rate because they are the closest thing to a risk free security that was available in Iran in early 1982. Defendant asserted that these bonds were not available in 1982, and that the payment of interest was in any case prohibited by law. However, while the payment of “interest” had become legally forbidden as contrary to Islamic law following the Revolution, banks and creditors continued to charge and receive interest by referring to it as “prizes,” “bonuses” and “awards.” In particular, payments of principal and interest on the five-year Iranian bond as well as substantial trading of the bonds continued through 1982. Accordingly, the Court accepts the 10% rate chosen by Reilly as the appropriate “risk free” rate of return. b. Long-Term Equity Risk Rate and Small-Stock Equity Risk Rate After determining the “risk-free” rate, the next component of risk to determine is the long-term equity risk rate. Reilly determined this to be 8.3 percent. This reflects the additional risk of equity securities or common stock over long term bonds. Because there was no Iranian data from which to calculate the long-term equity risk rate, Reilly relied on data found in Ibbotson’s 1981 Yearbook (hereinafter “Ib-botson”) because the equivalent data was not available for Iranian stocks. Ibbotson documents the rates of return that large New York stock exchange companies paid investors for 1981, the last complete year before the valuation date. That rate was 8.3%, which the Court accepts as the appropriate long-term equity risk rate. The next component of the present value discount rate is the small stock equity risk premium. This reflects the additional risk involved in investing in a small company such as Pak Dairy. There were no sources of Iranian data on small company risk premiums, so Reilly turned again to the data in Ibbotson. Ibbotson shows that the small stock equity risk premium was 6% in 1981, and the Court accepts that as the appropriate small stock equity risk premium in this case. c. Company and Country Specific Risk The last two components in calculating the present value discount rate are company specific risk and country specific risk. The company specific risk premium is the additional premium resulting from the fact that Pak Dairy was riskier than the small publieally traded companies on which the small-stock risk premium is based. The country-specific risk premium rate reflects the particular risks associated with investing in a company located in Iran. Reilly estimated that it would be 25% riskier to invest in Pak Dairy in Iran than in the companies represented by the small-stock risk premium. He accordingly calculated his combined company and country specific risk as equal to an additional 25% of the sum of his risk free rate, long term equity risk premium and small company equity risk premium, i.e. 25% of 24.3%, to arrive at a 6% additional premium for company and country specific risk. Of this, he assigned 3% to company risk and 3% to country risk. Richman also determined that the company risk premium should be 3% but made a judgment that an investor would demand a country-specific risk premium of 12 percent. Thus, he calculated his combined company and country specific risk premium to be 15 percent. In the appraisal literature, the generally accepted range for the combined company and country specific risk premium is 0% to 10 percent. Given the situation in early 1982, Iran should be placed at the high end of this range. Risks generally taken into account in determining risk include expropriation, hyperinflation (which acts as a form of expropriation by devaluing the currency), and cross-border wars. All three risks were present on the valuation date. Given the Islamic and socialist character of the government, a respect for private property rights was far from assured. Further, inflation was around 20% and the war with Iraq was ongoing, although the risk from war had dramatically diminished and the high inflation rate could also be expected to moderate given the end of the embargo and the rapid increase in oil exports. Accordingly, the Court finds that the country specific risk premium should be 6% and the combined company and country specific risk premium equal to 9 percent. The total cost of equity or equity rate of return is thus 10% + 8 3% + 6% + 9% = 33.3 percent. d. Cost of Debt Reilly estimated the cost of Pak Dairy’s debt based on the range of interest rates on commercial loans reported by Bank Markazi for early 1981. Such rates ranged from 8% to 12%, and Reilly assumed that Pak Dairy would be in the middle. Reilly concluded, and the Court so finds, that the average rate of return to holders of Pak Dairy’s debt was therefore 10 percent. e. Present Value Discount Rate The final step in calculating the present value discount rate is to calculate Pak Dairy’s mix of equity and debt capital, i.e. the weighted average cost of capital. Approximately 19.7% of Pak Dairy’s capital consisted of debt with a 10 percent rate of return. The other 80.3% of Pak Dairy’s capital was equity at the 38.3% rate. The weighted cost of capital is thus 28.7 percent. The Court finds that this is the appropriate present value discount rate to determine the value of Pak Dairy. A Overall DCAP calculation Given an adjusted average net historical cash flow of $3,082,388 and a growth rate of 15%, the “normalized” income to be capitalized is $3,544,746.20. The capitalization rate is equal to the present value discount rate of 28.7% minus the growth rate of 15%, or 13.7 percent. The value of Pak Dairy calculated under the DCAP method is then equal to the normalized income divided by the capitalization rate, or $25,874,059.85. This figure includes both the value of the equity in Pak Dairy and the value of its debt. To calculate the total value of the company’s equity alone, it is necessary to subtract the value of the debt (approximately $3,637 million), yielding a total equity value of $22,237,059.85. G. The Discounted Cash Flow Method In addition to valuing Pak Dairy using the DCAP method, Reilly also valued the company using the DCF method, another income-based approach to valuing a going concern. Under the DCF method, Reilly calculated the value of the company as equal to the present value in April of 1982 of projected net income in the years 1982 through 1986 plus the discounted terminal value of the company in 1987. To calculate projected net income in 1982-86, Reilly relied on sales projections found in a proposed 1982 budget presented by Khabiri as Managing Director to the Pak Dairy Board of Directors. The figures were prepared by personnel in the sales and production departments. In a Board meeting on April 12, 1982, the Board rejected the budget for three reasons: (1) “the planned budget does not reflect the real situation,”; (2) “the forecasts are not done correctly,” and (3) the fiscal year of the company had been changed from one ending in December (as the proposed budget did) to one ending in September. Def. Ex. 72B. Instead, the Board decided not to rely on any prepared budget for that fiscal year. The proposed 1982 budget projected a 51.2% increase in total revenues in 1982. From this growth projection, Reilly calculated growth projections for succeeding years by scaling down the growth rate by 10% each year until he reached his own estimate of long term growth of 20 percent. He thus calculated a 40% increase in total revenues in 1984, a 30% increase in 1985, and a 20% increase in 1986. Using these growth rates, he calculated net revenues in each year using both the estimated 1982 sales figures and estimated 1982 costs and expenses. He then discounted each year’s projected net income using the present value discount rate of 26 percent. Without making any adjustments to reflect the value of the New Projects, he calculated the sum of the present value of net income from April 1, 1982 through 1986 to be $15,839 million. He calculated the terminal value of the company, discounted to its present value, to be $43,969 million. He thus found the fair market value under the DCF method to be approximately $56.2 million. The Court finds that the DCF method should be rejected in this particular case. Because the DCF method rests entirely on projections of income, it does not offer the inherent accuracy of the actual historical income figures used in the DCAP method. Rather, its reliability depends heavily on the basis of the projections. As stated in Reilly’s text, Valuing a Business, “the Discounted Economic Income Method is practical only to the extent that the projections used are reasonable to the decision-maker for whom the valuation is being prepared. Without supportable projections, the discounted income method can convey an aura of precision that is not warranted.” Tr. 2/17/00 a.m. at 49. The Court finds that the figures in the 1982 budget are not a sufficiently reliable basis for projecting future income. First, the budget, entered into evidence as Pl.Ex. 20, contains a number of significant errors, although it is not clear whether they are errors in the original Farsi-language version of the proposed budget or errors in the English translation which Reilly relied upon. For example, the very first numbers on the budget indicate that sales of plain milk in \ liter bottles rose from approximately 2.5 million units in 1980 to 22 million units in 1981, or roughly 880%, a clearly erroneous value. In fact, the budget also states that the variance between the two years is only 11 percent. Further, the budget prediction for 1982 sales is approximately the same as in 1981, but the budget asserts that this constitutes a 22% rise in sales. Projected figures for the increase in total sales in 1982 are also facially inconsistent. Separate figures for total sales of each separate product line sum up to an increase of approximately 3.6 billion rials while the single figure provided for total sales of all products shows a rise of only 3.1 billion rials. Given these facial errors in figures in the budget, the Court is unable to find that the figures accurately reflect the predictions of Pak Dairy’s various departments. Further, even ignoring the problem of mathematical errors, the projections cannot be reasonably relied upon. Approximately 80% of the 51.2% increase in 1981 was attributed to a rise in butter sales revenues, which were predicted to increase by 91.7 percent. This projection was based on the assumption that the plant would be producing butter at a rate near its full capacity. However, while supply problems overall were improving for Pak Dairy, as noted above, they were not eliminated by April of 1982, nor was it likely that they would be entirely eliminated during the remainder of the year. Indeed, even the Managing Director’s predictions (which he made in a letter to the Board which accompanied the proposed budget) do not on their face support the conclusion of full capacity production for all of 1982. The letter dated February 20, 1982 states only that the company “will be able to secure all raw materials” needed for maximum production, Pl.Ex. 18 (emphasis added), not that they had already done so. In any event, it was known in April of 1982 that the company to that date had not approached full capacity production in either butter or milk in the early months of 1982 and that the proposed budget numbers were therefore necessarily erroneous. The prediction of 51% growth for 1982 was thus not one which a reasonable investor would rely upon in April of 1982. The fact that the budget was ultimately rejected by the Board, standing on its own, would not necessarily condemn the budget’s accuracy. However, it reinforces the Court’s conclusion based on the proposed budget itself that the forecasts are not a reliable basis for calculating the market value of Pak Dairy. Accordingly, the Court will rely solely on the value calculated under the DCAP method in determining the fair market value of the company. H. The Dividends Pak Dairy declared a dividend for 1980 income on March 17, 1981 which was approved by the shareholders on April 11, 1981 (the “1981 dividend”). The total dividend amount was 119,790,000 rials. On April 4, 1982, Pak Dairy again declared a dividend for 1981 income equal to 119,790,-000 rials. The total dividen