How are rate of return and valuation multiples linked?
By determining the required rate of return of a business we are able to convert it into a business valuation multiple.
A rate of return, or capitalisation rate, can be converted to a multiple by dividing 1 by the capitalisation rate. For example, if it is determined that a required rate of return to invest in a business is 40%, its multiple would be calculated as 1 divide 0.40 = 2.50.
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