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Discount Rate
Updated over a month ago

For the Entity and Equity Approaches, a Discount Rate is required in order to discount the future cash flows. The appropriate Discount Rate to use depends on the approach selected.

Valutico’s approach is based on the Capital Asset Pricing Model (“CAPM”) (see here for more information). The CAPM is based on observations from listed companies hence Valutico allows for the inclusion of an additional Cost of Equity premium (derived from the Qualitative Assessment, or directly entered by the user) to account for the difference in riskiness between the private company being valued and its peer group of larger, listed companies.

The detailed formulas for Cost of Equity, Cost of Debt and Weighted Average Cost of Capital are shown below.

Cost of Equity


CoE = Cost of Equity

Rf = Risk-Free Rate of Return

= Levered Beta

M = Market Rate of Return

Ep = Cost of Equity premium


Cost of Debt


CoD = Cost of Debt

Rf = Risk-Free Rate of Return

CS = Credit Spread

T = tax rate


Weighted Average Cost of Capital

WACC = Weighted Average Cost of Capital

E = Market Value of a firm’s Equity

D = Market Value of a firm’s Debt

V = Total Value of Capital (E + D)

CoE = Cost of Equity

CoD = Cost of Debt

T = Tax Rate

The Discount Rate tree on the Valuation screen provides an overview of how different inputs to Cost of Capital, that are used in the Income-Based Methodologies, are calculated.

Cost of Equity

Parameter

Input / Default

Can be overwritten directly?

Used in

Unlevered Beta

Median of Peers from Peer Selection screen

Yes - Change Parameters menu on Valuation Creation

CoE

Tax rate

Based on Headquarters entered in Valuation Creation screen

Yes - Change Parameters menu on Valuation Creation

CoE

Target D/E ratio

Median of Peers from Peer Selection screen

Yes - Change Parameters menu on Valuation Creation

CoE

Market risk premium

Damodaran calculation: Country Credit Spread (based on credit rating) x Emerging Markets Volatility Adjustment + Mature Market Equity Market Risk Premium

Yes - Change Parameters menu on Valuation Creation

CoE

Levered Beta

= Unlevered Beta * [1 + (1 – Tax Rate) * (Debt / Equity)]

No, but Unlevered Beta can be set on Peers & Change Parameters menu on Valuation Screen

CoE

Company risk premium

Market risk premium x Levered Beta

No - Calculation

CoE

Risk-free rate

Average yield of 10-year government bonds

Yes - Change Parameters menu on Valuation Creation

CoE

Cost of Equity Premium

Based on outcome of questionnaire on Qualitative Assessment screen

Yes - Change Parameters menu on Valuation Creation

CoE

Cost of Equity

Company risk premium + Risk-free rate + CoE premium

No - Calculation

CoE

Equity ratio

1- D/C ratio

No - Calculation

CoE

Cost of Debt

Parameter

Input / Default

Can be overwritten directly?

Used in

Risk-free rate

Average yield of 10-year government bonds

Yes - Change Parameters menu on Valuation Creation

CoD

Spread over risk-free rate

Median of Peers from Peer Selection screen

Yes - Change Parameters menu on Valuation Creation

CoD

Cost of debt (pre-tax)

Risk-free rate + Spread over risk-free rate

No - Calculation

CoD

Marginal tax rate

Based on Headquarters entered in Valuation Creation screen

Yes - Change Parameters menu on Valuation Creation

CoD

Cost of debt

Cost of debt (pre-tax) x (1 - Marginal tax rate)

No - Calculation

CoD

Debt ratio

Median of Peers from Peer Selection screen

Yes - Change Parameters menu on Valuation Creation

CoD

WACC

Cost of Equity x Equity ratio + Cost of Debt x Debt ratio

No - Calculation

CoD

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