The Discount Rate The appropriate discount rate must reflect the expected return available on alternative investment opportunities with equivalent risks. Because the NCFE in the Single Period Capitalization Method represents a return generated by the common equity of the Company, the appropriate discount rate would be only the equity return. The cost of any debtor preferred equity arrangement has already been accounted for in the NCFE calculation. The Company’s after‐tax cost of equity was developed through the use of the buildup or summation model, the formula of which is expressed as follows Re = Rf + ERP + SRP + CSRP Where Re = Required Rate of Return on Equity Rf = Risk‐Free Interest Rate ERP = Equity Risk Premium SRP = Size Risk Premium
