Implied Discount rate - NABE

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Example – Reconciling Discount RatesThe Business Portfolio of Assets—Risk and Return CharacteristicsAsset Type Value WeightRequiredReturnDollarReturnWeightedReturnTangible AssetsWorking Capital 200 8.1% 3.5% 7 0.28%Fixed Assets 475 19.2% 5.0% 24 0.96%Other Assets 50 2.0% 5.5% 3 0.11%Intangible AssetsTrade Name 250 10.1% 15.0% 38 1.52%Customer Relationships 1000 40.4% 16.0% 160 6.46%Goodwill 500 20.2% 20.0% 100 4.04%Total Business 2475 100.0% 331WARA 13.37% 13.37%• The 13% WARA calculated above should approximate the company’s WACC8
Income Method• Under the income method, the PCT payments are calculated as follows:(PV of cash flows from the cost sharing alternative) – (PV of cash flows from thelicensing alternative)• The final regulations emphasize further that the financial projections used in applyingthe income method are “necessarily the same” in comparing the cost sharingalternative to the licensing alternative• Consequently, differences between the discount rates must reflect only thedifferences between the obligations undertaken under the two alternatives• The effective result is:– PCT Payor is left with a return for its “routine” functions and risk plus an appropriateexpected rate of return for its risky investment in intangible investment.– PCT Payee captures all future “economic profit” over and above the return for routinefunctions/risks• The PCT payments are primarily a function of:– Discount rate spread between the licensing and cost sharing alternatives– Projections regarding long-horizon expected profitability9
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 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 and 18: 2011 Temporary Regulations - Exampl
Page 19 and 20: Forms of Payment and Discount Rates
Page 22: Discount rate of revenue stream - N

Implied Discount rate - NABE

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