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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 premi
Having highlighted the issues, we draw on our experience and highlight below some of the common things to bear in mind when estimating the appropriate discount rate and performing a meaningful DCF analysis: a. Match the discount rate to the risk Each stream of cash flow has a specific risk structure. For instance, if the cash flows are ...
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