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HezBallah

Registered: Jan 2008
Posts: 136

10-29-12 01:51 AM

Why does the discount rate here different from what I thought a discount rate is? Why does it take into account the weighted cost of capital? I realize this is a CAPM equation... but why does it intuitively make sense as a discount rate? Why isn't the discount rate just the risk-free interest rate?

The discount rate. This is the rate at which you discount future cash flows.

The discount rate is by how much you discount a cash flow in the future. For example, the value of $1000 one year from now discounted at 10% is $909.09. Discounted at 15% the value is $869.57. Paying $869.57 today for $1000 one year from now gives you a 15% return on your investment. The discount rate is essentially your required annual return on investment.

http://www.investopedia.com/univers...p#axzz2ARkx27dn

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newwurldmn

Registered: Apr 2011
Posts: 2662

10-29-12 02:02 AM

Whats up with all the corporate finance questions?

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HezBallah

Registered: Jan 2008
Posts: 136

10-29-12 02:13 AM

I've been reading a bunch of research reports lately and I'm trying to better understand them.

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newwurldmn

Registered: Apr 2011
Posts: 2662

10-29-12 02:33 AM

Istead of askng here where you'll get a lot of random people guessing, you should get a good corporate finance text book. They are pretty easy to read and probably cheap.

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