Discount and Capitalization Rate Example

Question 1

Part 1

Answer 1

Long Term Risk Free Rate
Equity Risk Premium
Illiquidity Premium

Question 2

Part 2

Answer 2

Competitive Environment
Competitive Advantage
Customers

Question 3

Part 3

Answer 3

Aggressive Cash Flow

Nominal ReU

Question 4

Part 4

Answer 4

WACC (nominal)

Real WACC

Question 5

Part 5

Answer 5

Growth
Terminal Value Risk
Capitalization Rate for Terminal Value

Question 6

How do you convert nominal ReU to nominal WACC?

Answer 6

ReU x (1 - TxD)

20.25 * (1 - .25 * .4) = 18.225%

Question 7

How do you convert Nominal WACC to Real WACC?

Answer 7

[1.18225/1.02 - 1] = 15.91%

Or divide the 1 plus Nominal WACC by 1 plus inflation - 1