What Discount Rate Should Be Used? (Final)
Dr Gerald Strever - Financial Modeling Expert
I teach managers how to make better decisions and maximize their companies' value and ROI.
We can now calculate the WACC.
First the Cost of Debt.
Rd = I * (1-t)
Where:
Rd = Required return to the debt holders
I = Nominal interest rate
T = marginal tax rate
The cost of equity is usually calculated using the Capital Asset Pricing Model.
Re = Rf + β ( Rm – Rf )
Where:
Re = Required return to the Equity holders
Rf = Risk free rate
β = Beta – a measure of the riskiness of the returns on the asset you are valuing versus the riskiness of the returns on the market as a whole
Rm = Average return that can be earned in the market
The Weighted average Cost of Capital can then be calculated, using the market values of the Debt and Equity.
Where one can find the various metrics (free) is covered on the course. We will also discuss the beta, which is usually based on the historical beta (riskiness) of the returns on the asset. However historical beta does not always equal future beta. A better approach will be covered on the course.