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http://www.nysscpa.org/cpajournal/old/16373958.htm This approach to discount rate determination is generally referred to as the buildup approach. The rate is built up by starting with the current risk-free rate and adding one or more components of risk appropriate to the business to be valued. The risk-free rate is determined by reference to U.S. government securities. The long-term Treasury bond is most commonly used. However, some appraisers use short- or intermediate-term government securities. The choice depends on the appraiser's assumption regarding the life expectancy of the business to be valued. Although there is some variation in technique and terminology, three basic methods are commonly used to calculate risk premiums. Comparable Public Companies Method. This method is frequently referred to as the capital asset pricing model (CAPM) method. However, all three of the build-up methods are to some extent based on CAPM theory. CAPM is a basic theory that relates risk and return for any asset. It is based on the concept that the required rate of return for an asset is directly related to the riskiness of the asset. Greater risk requires a higher rate of return. CAPM measures risk in terms of the relative volatility of the asset price.
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