Discount rate

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This will illustrate a way to build the equity discount rate used in WACC, DCF and/or Excess Earnings calculations. It will be build up as a specific discount rate for a specific company and always needs to be validated by comparison against recent transactions or so to provide a profound basis for calculating a value.

The discount rate is estimated as follows:

Discount rate element

Risk rate

Notes
Risk-free rate of return, such as a Government’s bond yield

3.00%

Current US Treasury bond yield is used.
Premium for equity investment

6.10%

Risk-premium for listed company shares investment.
Risk-premium for small company size

9.85%

Risk premium for investing in a small company.
Industry specific risk-premium

1.02%

Risk depending on the industry, for example Management Consultancy Services
Company-specific risk premium

2.50%

Specific subject business risk premium
Equity discount rate

22.47%

SUM of above
Net cash flow growth

3.52%

Long-term growth rate in subject business Net Cash Flow (NCF).
Capitalisation rate

18.95%

Difference between the Equity Discount Rate and NCF Growth Rate above.
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