NAC361.425. Income approach indicator of value: Capitalization rate.

The capitalization rate will be established from a selected number of firms to derive the rate for the typical company in each industry group when the information is available:

     1. The band-of-investment method will be used in the compilation of the capitalization rate.

     2. The band-of-investment method represents the cost of the money needed by the typical company in each industry group to acquire its operating plant and carry on its operations. It is composed of two factors:

     (a) The capitalization ratios of the typical company; and

     (b) The cost of the items which comprise the total capital structure of the typical company.

     3. A “typical company” means a theoretical company which is representative of the firms within an industry group. The selected firms in the industry group will be comparable in amount of revenues, bond ratings, nature of operations and regulatory environment. Certain nonutility conglomerates which have utility operations in Nevada will be studied in the light of other similar conglomerates. Conglomerates will not be grouped with nonconglomerates where possible. The development of the typical company will reflect input by the companies within the industry group which are centrally assessed.

     4. The items which comprise the total capital structure of the typical company are those amounts as recorded for financial reporting purposes that represent the sources of the money or capital funds made available to acquire the taxable operating property of the industry group. For the purposes of this subsection, “capital funds” means money obtained from:

     (a) Creditors through notes or bonds;

     (b) Stockholders through stocks, paid-in capital and undistributed retained earnings; and

     (c) Similar financial capital accounts, except not from the Federal Government through deferred income taxes.

Ê The total capital structure of the typical company will be derived through the use of a statistical median from the selected sample of firm calculations.

     5. In addition to the total capital structure of the typical company derived pursuant to subsection 4, the taxpayer may present and the Department shall consider the total capital structure of the typical company based upon common equity, preferred equity and the long-term debt percentages as developed from market information for comparable companies in the industry group. The total capital structure of the typical company must be derived from the use of market information from the selected sample of firm calculations.

     6. The annual average of high-low monthly yields to maturity compiled by Moody’s Investors Service (Public Utility and Transportation), or another accepted service approved by the Executive Director of the Department, will be used for the assignment of a cost to the long-term bonded indebtedness component of the total capital structure.

     7. The assignment of cost to preferred stock will be determined in a manner consistent with subsection 6.

     8. The assignment of cost to that portion of the total capital structure which represents equity for the typical company in each industry group will be determined in the following manner:

     (a) The Department shall develop an equity rate for each industry group based on one or more of the following models:

          (1) Discounted cash-flow method.

          (2) Capital asset-pricing.

          (3) Risk premium analysis.

     (b) The Department shall also consider the results of cost of equity studies provided by members of the industry group based on the models set forth in paragraph (a).

     (c) When considered applicable, the cost of equity capital established for the industry group may be determined by using additional models, such as direct capitalization, accepted in the appraisal and financial communities and approved by the Executive Director of the Department.

     9. The capitalization rate of the typical company for the industry group will be calculated by using a weighted method (band-of-investment) which is the total capital structure percentage times the component rate percentage. The weighted values are then totaled and rounded to four decimal places to get the capitalization rate.

     EXAMPLE:

	MEDIAN
	CAPITAL			WEIGHTED
TYPICAL COMPANY	STRUCTURE	X	RATE =	RETURN
Common Equity	42.50%		11.20%	4.76000%
Preferred Equity	9.25%		9.35%	.86488%
Long-Term Debt	48.25%		9.45%	4.55963%
Capitalization Rate
for Industry Group				10.1845%

     10. The determination of the income value indicator requires the capitalization of the adjusted net operating income at the current capitalization rate. Financial data for selected companies in each industry group, as presented in the latest annual reports by Moody’s Investors Service (Public Utility and Transportation), or another accepted service approved by the Executive Director of the Department, will be used in the compilation of the capitalization rate of the typical company.

     11. An alternative to the capitalization rate method in subsections 1 to 9, inclusive, may be the use of a rate for the industry group as published by the Western States Association of Tax Administrators, or another recognized tax related organization approved by the Executive Director of the Department.

     (Added to NAC by Tax Comm’n, eff. 9-30-88; A by R085-98, 11-23-98)