Nev. Admin. Code § 361.425 — 361.425

NAC 361.425    Income approach indicator of value: Capitalization rate. ( NRS 360.090 , 361.320 )    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)