Study For The Calculation Of Disconut Rate In Business Valuation

With the further prosperity of China's market economy and the M&A activity in the ascendant,Business Valuation has been playing an increasingly important role in economic area and widely functioning in various fields such as M&A,Financial Management, Strategic Investment Decision and so on.Among all kinds of basic methods for Business Valuation,the Income Approach best reflects the business features of sustained profitability, so it is also an appropriate method best reflecting the objective value of business.However, in the field of Business Valuation in China, the application of the Cost Approach has long been in a frequency,while the research and application of the Income Approach is lagging behind.The relevant parameters of the Income Approach,especially the discount rate,have a great impact on evaluation result.As an important parameter to evaluate the business value,the discount rate greatly influences the fairness of evaluation result.An minor adjustment of discount rate will directly lead to great differences of results.Therefore, how to fully and correctly define the business risk,and how to figure out an reasonable discount rate have become a centre issue in Business Valuation.This paper focuses on the issue of calculation of discount rate, using a variety of analysis methods.First, this paper analyzes the composition of the discount rate from the nature of it,and distinguishes it from the concepts which may easily be confused with it,in order to help people clarify the misunderstanding of the discount rate.Second,this paper makes a qualitative analysis on applicability of various mainstream methods to calculate the discount rate under the market economy in China, makes a quantitative evaluation on the most commonly used CAPM model parameters and proposes the optimization conclusion.Third, according to the need for evaluation practice, this paper classifies the business types from two dimensions, and suggests, according to their different characteristics, that different business companies should choose the most appropriate method for calculating the discount rate.Finally, through a case, this paper explains in details how to calculate the discount rate in Business Valuation. For the reason that it is more easy to calculate the discount rate of listed companies, the target company selected in the case is an ordinary non-listed company.