Discount Rates for Consistent Valuation of Various Measures of Book Income and Cash Flow

摘要

Appraisers of commercial property, businesses, and industrial facilities often consider forecasts of income including earnings before interest, taxes, depreciation, and amortization, net book income or earnings, pre-tax net cash flow, and after-tax net cash flow. Methods of calculating discount rates for these measures of income, by adjusting an estimate of the weighted average cost of capital, are based on the assumption of uniform and perpetual income. That assumption, however, is unrealistic and can lead to errors in value exceeding 20%. This article presents an approach that corrects the assumption and provides a consistent set of discount rates for EBITDA, E, PTNCF, and ATNCF that assists in evaluating market data and reconciling estimates of value.