Spotlight on discount rates
Abstract: As the business valuation discipline matures, laypeople are becoming more comfortable with the income approach, including the capitalization of earnings and discounted cash flow methods. But translating a business’s perceived risk into a reasonable discount rate is one of the most subjective — and contentious — aspects of this approach. This article highlights various techniques for discounting future benefits into today’s dollars. It also discusses how to determine a company’s appropriate capital structure — or relative percentages of debt and equity.