Discount Rate Calculation
Note: all cells in blue font with blue titles are assumptions that the user must fill in
Calculation of Beta from Comparables
(in $000s)
Comparable Companies Levered Beta Equity Market Capitalization Total Debt Tax Rate Unlevered Beta
xxx 1 1 1 35% 0.606
xxx 1 1 1 35% 0.606
xxx 1 1 1 35% 0.606
xxx 1 1 1 35% 0.606
xxx 1 1 1 35% 0.606
xxx 1 1 1 35% 0.606
xxx 1 1 1 35% 0.606
xxx 1 1 1 35% 0.606
xxx 1 1 1 35% 0.606
xxx 1 1 1 35% 0.606
High Unlevered Beta 0.606
Mean Unlevered Beta 0.606
Median Unlevered Beta 0.606
Low Unlevered Beta 0.606
Calculation of the Cost of Equity
Market Risk Premium (Rm) 6%
Risk-Free Rate (Rf) 5%
Target's Estimated Unlevered Beta (βu) 0.606
CAPM = Rf + ((βu) * (Rm - Rf)) 0.056
Cost of Debt of Target Company 8%
Calculation of the Weighted Average Cost of Capital (WACC)
Target Company Equity Total Debt Tax Rate
MyCo 1 1 35%
Weighted Average Cost of Capital = ((Equity/Enterprise Value)*(Cost of Capital)) + ((Debt/Enterprise Value)*(Cost of Debt)*(1-taxrate))
Enterprise Value = Equity + Total Debt 2
WACC 0.054030303
Discounted Cash Flow Calculation
Income Statement
(in $000's)
Year ending December 31,
2007 2008 2009 2010 2011 2012 2013 2014
Revenue $100 $150 $200 $200 $200 $200 $200 $200
Cost of Sales 0 0 0 20 20 20 20 20
Gross Profit 100 150 200 180 180 180 180 180
Operating Expenses
Research & Development 0 0 0 24 24 24 24 24
Sales & Marketing 0 0 0 26 26 26 26 26
General & Administrative 0 0 0 28 28 28 28 28
Total Operating Expenses 0 0 0 78 78 78 78 78
Operating Income 100 150 200 102 102 102 102 102
Interest Expenses
Interest Expense 0 0 0 0 0 0 0 0
Interest Income 0 0 0 0 0 0 0 0
Net Interest Expense 0 0 0 0 0 0 0 0
Pretax Income 100 150 200 102 102 102 102 102
Taxes 0 0 0 0 0 0 0 0
Net Income 100 150 200 102 102 102 102 102
Revenue Growth 0.5 0.33333333 0.0% 0.0% 0.0% 0.0% 0.0%
Gross Margin 100.0% 100.0% 100.0% 90.0% 90.0% 90.0% 90.0% 90.0%
R&D/Revenue 0.0% 0.0% 0.0% 12.0% 12.0% 12.0% 12.0% 12.0%
S&M/Revenue 0.0% 0.0% 0.0% 13.0% 13.0% 13.0% 13.0% 13.0%
G&A/Revenue 0.0% 0.0% 0.0% 14.0% 14.0% 14.0% 14.0% 14.0%
Operating Margin 100.0% 100.0% 100.0% 45.0% 45.0% 45.0% 45.0% 45.0%
Pretax Margin 0.0% 0.0% 0.0% 0.51 0.51 0.51 0.51 0.51
Net Margin 0.0% 0.0% 0.0% 51.0% 51.0% 51.0% 51.0% 51.0%
Relevant Sections from Balance Sheet
Year ending December 31,
2007 2008 2009 2010 2011 2012 2013 2014
Current Assets
Cash $0 $0 $0 $0 $0 $0 $0 $0
Accounts Receivable 0 0 0 $0 $0 $0 $0 $0
Inventory 0 0 0 $0 $0 $0 $0 $0
Other Current Assets 0 0 0 0 0 0 0 0
Total Current Assets 0 0 0 0 0 0 0 0
Current Liabilities
Accounts Payable $0 $0 $0 $0 $0 $0 $0 $0
Short Term Debt