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Explaination For Rates

The risk-free rate for Domino's UK valuations is set at 3.75% based on the UK 10-year government gilt. A levered beta of 1.23 was calculated using the restaurant sector's unlevered beta and Domino's capital structure, indicating higher volatility compared to the market. The resulting WACC of 7.87% reflects the company's cost of capital, accounting for leverage, sector benchmarks, and UK sovereign risk.

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4 views1 page

Explaination For Rates

The risk-free rate for Domino's UK valuations is set at 3.75% based on the UK 10-year government gilt. A levered beta of 1.23 was calculated using the restaurant sector's unlevered beta and Domino's capital structure, indicating higher volatility compared to the market. The resulting WACC of 7.87% reflects the company's cost of capital, accounting for leverage, sector benchmarks, and UK sovereign risk.

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favourableperson58
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© All Rights Reserved
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The risk-free rate of 3.

75% was determined using the yield of the UK 10-year government


gilt. This is the traditional benchmark for GBP denominated valuations, based on a long-term
default-free rate that is consistent with Domino's UK investment cycle and the present UK
monetary situation. The levered beta of 1.23 was produced by releveling the restaurant
sector's unlevered beta (0.80) and applying Domino's UK target capital structure (D/E = 0.71)
and a 25% corporate tax rate. This beta reflects the company's exposure to both industry risk
(restaurants are susceptible to consumer spending) and financial risk due to its debt level. A
beta greater than 1.0 suggests that Domino's UK equity is more volatile than the market,
which is consistent with its operating model and leveraged situation. All these factors work
together to guarantee that our WACC of 7.87% appropriately represents Domino's UK's cost
of capital, balancing firm-specific leverage, sector benchmarks, and the sovereign risk profile
of the UK.

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