Practical Considerations in Normalizing the Risk-Free Rate

Business Valuation UpdateVol. 29 No. 10
October 2023
Ronald D. DiMattia, CPA/ABV, CMA
cost of capital
cost of capital, discount rate, private company valuation, risk analysis, risk-free rate, cost of equity, equity risk premium (ERP)

Summary

Some valuation firms and practitioners have advocated that the risk-free rate of return (Rf) should be normalized when it is believed to be too low because of Federal Reserve Bank policies. Recent arguments for doing so have been based on technical economic analyses but have ignored practical aspects of normalizing Rf. This article is intended to address those practical considerations.