The Discount Rate for Discounted Cash Flow Valuations of Intangible Assets

To an increasing degree, companies are interested in the separate value of intangible assets. The need for separate valuation partly arises from new international accounting standards of the International Accounting Standards Board. Under certain conditions, these accounting standards allow the value of intangible assets to be determined using the discounted cash flow method, which requires the determination of the cost of capital of the relevant intangible assets. In this paper, the required return of intangible assets for 8 different business sectors is determined by means of an empirical study of companies from the US Standard amp; Poor's 500 Index. The resulting required return is subsequently compared with proxies for the required return on intangible assets used in practice, such as the weighted average cost of capital. As anticipated, the average required return for intangible assets was higher than the WACC. The cost of equity appears to best approximate the cost of capital of intangible assets