The discount rate, line by line
The discount rate turns the cash a business will make in the future into what that cash is worth today. Ours is built from four pieces, and each one is either published or set by a written rule. Here is every line of it for the sample business.
The answer for the sample business: 15.4%
The sample is a small business phone company with $2.65M in yearly sales. Its discount rate is 15.44%, which the report rounds to 15.4%. The chart builds it up from zero, one piece at a time.
How to read it. Start at the left: the return you could get with no risk at all. Each step to the right adds the extra return an investor asks for to take on one more kind of risk. The last bar is the sum.
Try it: build a rate
Change any answer and the rate rebuilds itself. It starts on the sample’s answers. The tests and points are the valuation policy’s own (version 1.2); the company-specific premium stops at 7 points however many tests fire.
Kind of business
Yearly revenue
The platform
The largest customer
The busiest carrier
Without the owner
Robocall database filing
911 compliance
Discount rate
15.44%the sample’s rateShow the build-up ▴
$100,000 earned five years from now is worth today at this rate.
What the rate does to value
At 15.4%, $100,000 that the business will earn five years from now is worth about $48,800 today. Every year further out, it’s worth a little less again. Add up every future year this way and you have the core of the value.
The rate discounts each year of forecast free cash flow, and the value after the last forecast year. At 15.44%, a dollar five years out is worth 0.488 today (1 ÷ 1.15445). For the sample, the value after the forecast is 37% of enterprise value, inside the range the method expects at the discount rates owner-run businesses carry.
The rate is the unlevered cost of capital, ku. Value is built as adjusted present value: free cash flow to the firm discounted at ku over a ten-year horizon, with the tax shield on debt valued separately rather than blended into a weighted cost of capital. Because the rate carries no leverage, it doesn’t move when the capital structure does.
The four pieces
1. Risk-free rate: 4.94%
What the US government pays to borrow for ten years. It’s the return on money that is almost sure to come back.
The 10-year US Treasury yield as of September 2026 (FRED series DGS10). It is fixed in the valuation policy, not looked up on the day of your run, so two runs a week apart don’t differ for no reason.
2. Market risk: 4.50%
The extra return investors expect for owning businesses instead of government bonds, adjusted for how risky your kind of business is compared with the average.
A long-run US equity risk premium of 4.5%, times a beta for the business type. The beta comes from the industry research: 1.0 for a phone company that owns its platform, 1.1 for a reseller, 0.9 for a residential provider, 0.8 for a book that is winding down. The sample owns its platform, so 1.0 × 4.5% = 4.50%.
3. Size: 5.50%
Small businesses are riskier than big ones: fewer customers, fewer people, less cushion. Investors want more return for that.
Set by revenue, in four tiers. The sample’s $2.65M of revenue falls in the first.
| Yearly revenue | Size premium |
|---|---|
| Under $5 million | 5.5 points |
| $5 million to $20 million | 3.5 points |
| $20 million to $100 million | 2.0 points |
| $100 million and up | 1.0 points |
4. This company: 0.50%
Anything about this one business that makes its cash less certain than its peers’. The sample has one: half its call traffic runs over a single carrier.
Points are added only when a written test fires. Each test reads an answer from the questionnaire, so the reason for every point is on the record.
| Test | Points | Lesser case |
|---|---|---|
| The platform is fully licensed from a vendor | 1.5 | partly licensed: 0.75 |
| The largest customer is over 20% of revenue | 1.5 | over 10%: 0.5 |
| One carrier carries 90% or more of the traffic | 1.0 | 50% or more: 0.5 applies here |
| The business depends on the owner | 2.0 | partly: 0.75 |
| The Robocall Mitigation Database filing is deficient | 1.5 | status unknown: 0.5 |
| 911 compliance is not in place | 0.5 |
The sample’s answer on carrier share is confirmed from a document. Its largest customer is 7.9% of revenue, under the 10% line, so that test adds nothing.
The formula and the policy
ku = rf + β · ERP + size + CSP
15.44% = 4.94% + 1.0 × 4.50% + 5.50% + 0.50%
- Policy version. 1.2. The risk-free rate, the equity risk premium, the beta table, the size tiers and the premium tests are all fixed in it; changing any of them is a recorded policy change.
- Cap. The company-specific premium is capped at 7 points, however many tests fire.
- Provenance. Every premium point rests on an input with its evidence tier printed beside it.
What would lower it
Two pieces are in the owner’s hands: the company’s own premium now, and size over time. For the sample, moving traffic so no carrier carries half of it would remove the half point. For other businesses the biggest items are usually depending on the owner (up to 2 points) and a largest customer above a fifth of revenue (1.5 points). The size premium drops by two points once revenue passes $5 million.
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