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Some common mistakes - Deloitte
Some common mistakes to avoid in estimating and applying discount ratesDeloitte | A Middle East Point of View | Spring 2014| 37 Discount ratesOne of the most critical issues for an investor toconsider in a strategic acquisition is to estimate howmuch the company being acquired is worth. On theback of the 2008 financial crisis, a valuation is beinglooked at not just as a static value at a point in time,but more as a basis for developing a post-acquisitionoperation plan to drive value accretion andminimizing risk. As such, the Discounted CashFlow (DCF) analysis is being more frequently usedto value companies. Ke = Rf + (RPm + RPi) + RPs + CRP + RPz (based on the Build-up approach)(based on the CAPM approach)Rf = risk-free rate, RPm = market premium, RPi = industry premium, RPs = size premium, CRP = country risk premium, RPz = company specific risk and = betaKe = cost of equity, Kd = after tax cost of debt,We and Wd = proportion of equity/debt based on market valueKe = Rf + ( x RPm) + RPs + CRP + RPz WACC = Ke x We + Kd x Wd38|D
4. Country risk premium sourced from Prof. Damodaran’s research based on sovereign credit rating by Moody’s 5. Industry risk premium sourced from SBBI Valuation Essentials handbook 6. Size and specific risk as per judgment based on market dynamics, school operations, competitive advantage, etc. As this is subjective, it
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