The discount rate is the rate used to convert future cash flows to their present value, reflecting both the time value of money and the risk inherent in those cash flows. In business valuation, the discount rate applied to unlevered free cash flows is the WACC; for equity cash flows, it is the cost of equity. The discount rate is the most sensitive parameter in a DCF model: a 1% variation typically changes enterprise value by 8–15%. Its construction — risk-free rate, beta, market risk premium, size premium, specific risk premium — must be carefully documented and justified.

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Example: a Swiss SME is valued using a DCF with a WACC of 9.5%. Sensitivity analysis shows that reducing the WACC to 8.5% increases the enterprise value from CHF 18.5 million to CHF 21.2 million (+15%) — a CHF 2.7 million swing for 1 percentage point of discount rate. This illustrates why the WACC is the most contested parameter in every valuation engagement.

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At Hectelion, discount rate construction is documented with precision and justified by reference to market data, making our conclusions defensible in all circumstances.