“Valuation literature states over and over again that discount rates are determined by the market,” says Gary Trugman, in a current article for the AICPA ABV e-Alert, which evaluates the new Butler Pinkerton Model (BPM) for quantifying company-specific risk. “In fact, I have taught for years that fair market value comes from the market.”  Objective, comparable data is the “very essence of the market approach,” he says, just as it is for the BPM.  “What…Butler and Pinkerton have done for the valuation community is to create a model…to determine the TCOE [total cost of equity] of our guideline companies. We can then adjust this information to make it applicable to the subject company,” giving a market approach twist to developing the discount rate.

“You have to have good guideline companies for this to work properly,” Trugman adds. “Once you determine the TCOE of your guideline companies, you adjust the TCOE to make it applicable to the subject,” using the same type of analysis as in adjusting pricing multiples.  “However, you do not have to worry about adjusting the TCOE for the difference in size…because the size premium is calculated separately,” using Duff & Phelps data, for example.