Implied Discount rate - NABE

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2011 Proposed Regulations - Example 9• Two cost sharing participants; one has a PCT contribution which is valued usingIncome Method• The discount rates for the cost sharing alternative is estimated at 15 percent andthat for the licensing alternative is estimated at 13 percent resulting in a $464 millionPCT• The Commissioner has additional data on discount rates for comparable companies• Based on available data, the Commissioner determines that an appropriate range for“implied discount rate” is 15 percent or 17 percent• The PCT values are calculated as $446 million and $ 501 million, with 17 percentand 15 percent discount rates, respectively• Since the taxpayer’s estimated PCT value lies between this range, it was deemedreasonable and no further adjustments issued18
Forms of Payment and Discount Rates• PCT payment may take the form of one-time lump sum payment, fixed installmentpayment or contingent payment• The final cost sharing regulations recognizes the difference in risk profilesassociated with different payment forms• A contingent payment based on sales will necessitate a different discount rate thanone that is based on profits or a fixed installment payment.• Discount rates for operating profit stream may be estimated by the WACC or theWARA.How does one estimate a discount rate for the revenue stream?• Finance theory can provide a useful framework to analyze the interrelationshipsbetween discount rates applicable to different cash flows to help estimate anapplicable discount rate for revenue/sales19
Page 2 and 3: NoticeANY TAX ADVICE IN THIS COMMUN
Page 4 and 5: Background• Discount rates reflec
Page 6: Risk vs. Expected ReturnThe least l
Page 9 and 10: Income Method• Under the income m
Page 11 and 12: Financial Projections and Discount
Page 13 and 14: The 2011 temporary regulations: dif
Page 15 and 16: The “Implied Discount rate”: in
Page 17: 2011 Temporary Regulations - Exampl
Page 22: Discount rate of revenue stream - N

Implied Discount rate - NABE

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