The discount rate is a critical input in the income approach for valuation, which determines an asset or business’s value by discounting its expected future economic benefits to a present value. The debate between valuation experts over the appropriate discount rate – which reflects both the time value of money and the riskiness of the economic benefits – has only heightened in recent years, as the Covid-19 pandemic has introduced changes and complexities to the economy and financial markets.
In a recent American Bankruptcy Institute Journal article, Senior Associate Julia Zhu examines how certain components of the weighted average cost of capital (WACC) – representing the combined rate of return on a company’s debt and equity capital – have changed in the pandemic era. The author discusses the resulting discount rate considerations for valuation experts and other bankruptcy professionals in a time of heightened uncertainty and volatility, as these changing factors can significantly impact valuation.
The full article, “Discount Rate Considerations in the Pandemic Era,” is available below.