Defining a discount rate to use Flashcards
The discount rate is the required rate of return which an investor should require given
The riskiness of the investment project
You can figure out a discount rate to work with by
Using the WACC
You can also find the discount rate by working with
Industry/sector standards
Another way to find a working discount rate is by
Using the build up method using a risk free rate as a starting point
The WACC
Reflects the weighted average of required rates of return for the sources of capital
Often times industry standards can
Help deduce a suitable discount rate using their aggregate WACC
The build up method
Uses a risk free rate as a starting point and adds additional risk premia
Examples or risk premia are
Equity size, company size, company specificity, country/region, product-specific premia