A 1% Change in Interest Rates Changes Corporate Value by 20% — An Introduction to Valuation in a “World with Interest Rates”｜ビスポークパートナー株式会社

1. Introduction — The “World with Interest Rates” Has Returned

On September 18, 2026, the Bank of Japan raised its policy interest rate to approximately 1.25%. This is the highest level in 31 years, just three months after the previous rate hike in June. Long-term interest rates have also continued to rise, and in the auction on October 6, the coupon rate for 10-year Japanese government bonds reached 3.1% per annum, the highest level in about 30 years.

Many people are likely feeling the changes in interest rates in their daily lives as variable mortgage rates and bank deposit rates begin to move. However, the impact is not limited to household finances. It extends to corporate financing, investment decisions, and even the price of companies themselves.

Many of those currently on the front lines of management have spent their entire careers in a world where “interest rates were almost zero.” It was an era where they barely had to be conscious of the cost of borrowing money or the opportunity cost of letting money sit idle.

That premise is beginning to crumble. And changes in interest rates move not only the interest on loans but also the “price of a company” itself. In this article, I will explain how interest rates change corporate value, using as few mathematical formulas as possible.

First, I will review the basic concept of corporate value, and then I will organize the mechanism by which interest rates affect corporate value through the discount rate. After that, I will verify how much impact there actually is using numbers, and finally, I will look at the composition of winners and losers and the impact on the M&A scene.

2. Corporate Value is Determined by “Discounting”

Corporate value is the sum of the money a company will generate in the future, discounted back to its present value. This is the concept of the DCF (Discounted Cash Flow) method. The “money” here refers to free cash flow, which is the cash generated by the business minus capital expenditures and the like.

The point is that “1 million yen in the future is worth less than 1 million yen on hand today.” If you receive 1 million yen now, you can invest it and increase it by the amount of interest after one year. Therefore, 1 million yen received one year from now must be evaluated at a discount compared to 1 million yen received now.

The discount rate determines “how much to discount.” The higher the discount rate, the smaller the future money appears in terms of present value. The further into the future the money is, such as 10 or 20 years from now, the greater the impact.

Let’s compare how the present value changes based on the combination of when you receive 1 million yen and the discount rate.

If the discount rate is 1%, 1 million yen 20 years from now will still be worth about 820,000 yen in present value. However, at 5%, it shrinks to about 380,000 yen. It can be seen that the difference in the discount rate has a greater effect on money further in the future.

In other words, corporate value is determined by two things: (1) how much it will earn in the future (cash flow) and (2) how much that is discounted (discount rate). Even if the business does not change at all, if the discount rate changes, the corporate value changes.

3. When Interest Rates Rise, the Discount Rate Rises

The discount rate used in calculating corporate value is generally called WACC (Weighted Average Cost of Capital). It is the weighted average of the costs incurred when a company raises funds, using funds from shareholders (shareholder equity) and funds from banks and other lenders (debt).

A rise in interest rates pushes up WACC through the following flow.

1. The risk-free rate rises: The yield on government bonds, which are representative of risk-free investments, rises.

2. The cost of shareholder equity rises: Investors think, “If I can earn this much with government bonds, I should demand a higher return for risky stocks.” Since the return demanded by shareholders is determined by adding a premium to the risk-free rate, if the base rises, the overall rate is also likely to rise.

3. Cost of debt rises: Bank lending rates and corporate bond yields increase, raising the cost of borrowing.

4. WACC rises: Since both the cost of equity and the cost of debt increase, the WACC, which is their average, also rises.

The cost of equity is generally calculated as the ‘risk-free rate + a risk premium.’ The risk premium is the equity market risk premium multiplied by the company’s stock price volatility. This is a concept known as CAPM (Capital Asset Pricing Model).

Let’s look at some concrete numbers. Suppose a company funds 70% of its capital through equity and 30% through debt. If the cost of equity is 7% and the borrowing rate is 2%, the WACC is approximately 5.3%, accounting for the tax-deductibility of interest (assuming a 30% effective tax rate). If interest rates rise by 1% across the board, bringing the cost of equity to 8% and the borrowing rate to 3%, the WACC rises to approximately 6.2%. While the actual cost of equity is also influenced by factors like the equity risk premium and does not necessarily move in lockstep with interest rates, it is certain that rising interest rates are a key factor pushing up discount rates.

What is important to grasp here is that it is not just ‘companies with debt’ that suffer when interest rates rise. Even for debt-free companies, as long as the return required by shareholders increases, the discount rate rises and corporate value falls. Interest rates are a force that acts upon the price of every company.

4. The impact in numbers

So, how much does corporate value change when the discount rate rises? Let’s verify this with a simple model.

Consider a company that generates 100 in cash flow next year and continues to grow at a constant rate every year thereafter. In this case, the corporate value is calculated using the following formula.

For a company with a 1% growth rate and a discount rate (WACC) of 5%, the corporate value is 100 ÷ (5% – 1%) = 2,500. If the WACC rises to 6% due to an interest rate hike, it becomes 100 ÷ (6% – 1%) = 2,000.

The company’s business has not changed at all. Sales, profits, and cash flow are the same. Yet, just because the discount rate rose by 1 percentage point, the company’s value dropped by 20%.

Looking at this result in terms of a multiple—how many times the annual free cash flow the corporate value represents—it has fallen from 25 times to 20 times. In other words, even if the cash flow generated by the company does not change, the value investors assign to that company changes significantly because the discount rate has changed.

A 1-point change is by no means an unrealistic assumption. The yield on Japan’s 10-year government bonds rose by approximately 0.9 points entering 2026. While the extent to which this is reflected in each company’s WACC varies, it can be said that we have entered a phase where we must reconsider the impact of interest rate fluctuations on corporate value.

Furthermore, it is worth noting that the higher a company’s growth rate, the greater the impact.

The value of high-growth companies depends heavily on money earned in the distant future. Because money in the distant future is more strongly affected by the discount rate, the loss in value is greater even with the same 1% increase. The property in the bond world that ‘longer-term assets are more sensitive to interest rates’ applies equally to stocks.

Note that this model is greatly simplified for the sake of explanation. The magnitude of the decline also varies depending on the difference between the discount rate and the growth rate, and the 20% figure is a calculation based on these specific assumptions. In reality, rising interest rates also affect the economy, growth rates, and cash flow. Nevertheless, the essence that ‘changes in the discount rate have a major impact on corporate value’ remains unchanged.

5. Who wins and who loses?

The impact of rising interest rates does not appear equally across all companies.

Companies strongly affected:

• Growth companies and startups: As seen in the previous chapter, the more a company’s value lies in future growth, the more its value is eroded by a rise in the discount rate. Companies that garnered high valuations in the zero-interest-rate era are under pressure for reassessment. For unlisted startups, ‘down rounds,’ where capital is raised at a lower valuation than the previous round, also become more likely.

• Companies with high debt: Not only does the rise in the cost of debt increase the WACC, but the increase in interest payments also puts pressure on cash flow and financial stability. The free cash flow used to calculate corporate value is a pre-interest figure, but if capital investment is squeezed due to deteriorating cash flow, future cash flow itself will shrink. For a company with 10 billion yen in variable-rate debt, a mere 1% rise in interest rates increases annual interest payments by 100 million yen. The impact is most direct for small and medium-sized enterprises with significant variable-rate debt.

Relatively advantageous companies:

• Mature companies with stable current earnings: As shown in the table in Chapter 4, the lower the growth rate of a company, the smaller the rate of decline in value. This is why so-called value stocks are more likely to be re-evaluated.

• Companies with pricing power: Companies that can pass on cost increases caused by inflation to their sales prices can protect their cash flow.

• Companies that have already borrowed at long-term fixed interest rates: Interest payments will not increase for the time being.

• Companies with large cash holdings: Interest income will increase, making them less susceptible to the impact of rising interest rates. However, since deposit interest rates are far below the cost of equity, this does not silence calls for capital efficiency.

• Banks: Increases in lending rates tend to outpace increases in deposit rates, making it easier for interest margins to improve (though there are headwinds such as valuation losses on held bonds and an increase in loan defaults).

What advantageous companies have in common is ‘current earning power’ and ‘preparedness for interest rate changes’.

Of course, rising interest rates also affect startup fundraising. Once a certain yield can be obtained from government bonds and deposits, the return investors demand for high-risk startup investments will also rise. Even in fundraising via J-KISS or SAFE, which I covered in a previous column, negotiations over valuation caps will likely become stricter than before.

6. Impact on M&A and PE

The impact of rising interest rates is most clearly seen in M&A, particularly in LBOs (leveraged buyouts) by PE funds.

In an LBO, most of the acquisition funds are covered by debt. Banks determine the loan amount by comprehensively looking at the ability to repay principal in addition to the ability to pay interest, as well as the debt-to-EBITDA ratio. If interest rates rise, the burden of interest payments increases, making it easier for the amount that can be borrowed to decrease even at the same profit level.

Let’s look at a simple example. Suppose we acquire a company with an EBITDA (earnings before interest, taxes, depreciation, and amortization) of 100. The bank requires interest payments to be kept to one-fourth of EBITDA, or 25, and the fund’s investment amount is fixed at 400 (this is a simple model that does not consider existing debt or transaction costs).

Just a 2-point increase in borrowing interest rates reduces the funds available for acquisition by about 20%. Converted to the EV/EBITDA multiple, which indicates the market sentiment for M&A, this is a decline from just over 10x to around 8x. Of course, the fund could increase its investment to maintain the acquisition price. However, in that case, the effect of leverage is diluted, and investment returns decrease. Rising interest rates exert downward pressure on the price a buyer can offer, both in terms of borrowing capacity and investment returns. Note that while this is the same ‘about 20%’ as in Chapter 4, it is due to a decrease in borrowing capacity, and the mechanism is different.

The practical problem here is the ‘gap in perspective’ between the seller and the buyer. Sellers remember the high multiples of the zero-interest-rate era. It is the feeling that ‘competitors sold for 10x’. On the other hand, buyers must raise funds at current interest rates and cannot pay the same price.

The impact is not limited to the time of acquisition. PE funds earn profits by selling (exiting) the company a few years later, but the sale price at that time is also affected by interest rates. Even if they bought it cheaply, if the multiple at the time of sale is also low, they will not achieve the expected return. The fund’s investment decisions must inevitably become more cautious.

As a result, changes are also occurring in the lineup of buyers. While PE funds that rely on debt find it difficult to offer high prices, operating companies with low debt dependency are in a position to offer prices relatively easily. In a rising interest rate environment, strategic acquisitions by operating companies may increase in prominence.

If this gap is not bridged, the deal will stall. Therefore, there may be more opportunities to utilize creative solutions such as ‘Earn-outs’, where part of the acquisition price is linked to future performance to bridge the valuation gap, or ‘Seller’s notes’, where the seller lends part of the payment to supplement the buyer’s financing. In M&A during a period of rising interest rates, not only the price level but also the design of payment terms and risk sharing will likely become more important negotiation items than ever before.

7. Conclusion — Interest rates are the gravity of corporate value

Interest rates are like gravity for corporate value. If gravity is weak, a ball flies high and far. In the era of zero interest rates, expectations for future growth significantly boosted corporate value. If gravity strengthens, the ball will fall short even if thrown with the same force.

What is important is not to separate changes in interest rates from ‘market talk.’ Interest rates are the foundation for everything: your company’s value, investment decisions, and M&A price negotiations.

All other things being equal, rising interest rates exert downward pressure on corporate value. Conversely, companies that can maintain their value despite rising interest rates are those that can demonstrate growth and profitability that exceed the increase in the discount rate. The fact that increasing earning power is the golden rule for improving corporate value remains unchanged in a world with interest rates.

In management, there are three specific points that should be reviewed.

• Investment decisions: Are you still evaluating investment projects using hurdle rates set under the assumption of low interest rates?

• Fundraising: Are the composition of variable and fixed interest rates, borrowing periods, and repayment capacity sufficient?

• M&A: Are sellers avoiding excessive expectations based on past transaction multiples, and are buyers considering price and financing conditions as a single package?

The interest rate level, the highest in 31 years, is giving both managers and investors an opportunity to rethink how they measure value. A ‘world with interest rates’ is no longer an exception. It is the new premise.

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<Source>

・Bank of Japan raises rates to 1.25% (Kyodo News, September 18, 2026)
・10-year JGB yield at 3.1%; interest rates rise to 30-year high (Kyodo News, October 6, 2026)