NAC361.456. Income approach indicator of value: Capitalization rate.

The capitalization rate will be established from a selected number of carriers and determined in the following manner to arrive at the typical company in the airline 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 the airline 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 carriers within an airline industry group. These carriers will be comparable in amount of revenues, bond ratings and nature of operations. Certain nonairline conglomerates which have airline operations in this State will be studied in light of other similar conglomerates. Regular carriers will not be grouped with conglomerates where possible. Development of typical company factors will reflect input by the carriers within the airline industry group which are centrally assessed. As used in this subsection, “nature of operations” includes, without limitation, the size, route structure and fleet diversification of the air carrier.

     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 airline industry group. As used in 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 capital structure of the typical company will be derived through the use of a statistical median from the calculations of the selected sample carriers.

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

     6. The annual average of high-low yields to maturity compiled by Moody’s Investors Service (Public Utility and Transportation) or another acceptable 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 airline industry group will be determined in the following manner:

     (a) The Department shall develop an equity rate for each airline 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 a carrier of the airline industry group based on the models set forth in paragraph (a).

     (c) When considered applicable, the cost of equity capital established for the airline industry group may be determined by using additional models, including, without limitation, 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 airline 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 carriers in each airline 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.

     [Tax Comm’n, Property Tax Reg. part No. 15D, eff. 10-30-79; A 10-15-81]—(NAC A 10-10-83; 9-30-88; R026-99, 1-27-2000)