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Discount Rate Calculation using the Built-Up Method

In company valuation, one method that can be used to select an appropriate discount rate for the business is to use the built-up method. Based on your analysis and understanding of the company’s economics and risk profile, you pick and add up the appropriate risk premium components to arrive at a final figure for your discount rate.

Components of Assets' Expected Returns

        Small Stocks Foreign Stocks  
Stocks       Small Stock Premium Foreign Stock Premium Foreign Bonds
Equity Risk Premium Bonds     Equity Risk Premium Equity Risk Premium Foreign Bond Premium
Long-Term Bond Premium Long-Term Bond Premium Cash Real Estate Long-Term Bond Premium Long-Term Bond Premium Long-Term Bond Premium
Real Risk-Free Rate Real Risk-Free Rate Real Risk-Free Rate Real return on Real Estate Real Risk-Free Rate Real Risk-Free Rate Real Risk-Free Rate
Inflation Inflation Inflation Inflation Inflation Inflation Inflation

Discount Rate Calculator

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Inflation rate %
Real risk-free rate %
Long-term bond premium %
Equity risk premium %
 
Discount rate %
Capitalization ratio x