Marketing Manager | Posted on | Share-Market-Finance
What discount rate do you calculate for your DCF valuation?
Entrepreneur | Posted on
Personally, I believe that it all depends on what kind of cash flow you’re discounting. So, the common sense says you don’t use one rate, but change it depending on your current situation and requirements. Like, for example, for the equities, you’re going to need a discount rate that’s appropriate for the risk you’re taking. If it’s government bond, you would use government bond rates of discount. But this being said, at least for the beginners, this isn’t a feasible option. It’s very confusing for them. Many want a basic discount rate for their Discounted Cash Flow (DCF) valuation.
Mostly, when I was starting myself, I would use FCFF. So WACC (Weighted Average Cost Per Capital) was my go to. I still use it primarily. WACC is the firm’s cost of capital where different categories of capital are weighted proportionately. Although it’s very reliable, I don’t blindly make my decisions based on it. My further calculation includes comparing WACC with banking sector deposit rates. Also, at times, I map sensitivity chart with various WACC and growth. This helps me better analyse and understand the case, which eventually helps me grandly in making right investments.
If you’re starting, my advice would be to go with WACC. And then you must continue learning new practices and methods to make your DCF valuation even more fool-proof.
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