Discount Rate

1. The discount rate you use is the rate of return of the best investment opportunity that is currently
available to you.

- u/fwtony

2. Whatever you'd like to earn. If you want to earn 10%, then discount future cash flows by 10% and
if you can find a stock price that makes sense, buy it.

-- u/CanYouPleaseChill

3. For the risk free rate just use the 10 year bond rate of the country's currency you want to do your
dcf in. Substract the default risk premium from it using country's CDS and you get a risk free rate.

- u/alberlovag

4. My main man Damadoran suggests using the risk free rate + the equity risk premium for a given
country.

- u/jiggzycoco

Expected return

Required rate of return

Rate of return for other investment

I would focus more on understanding the quality of business and earnings rather than get hung up
on whether or not you use a 9% or 10% discount rate. Truth be told is that if your decision comes
down to what discount rate you use then its a bad idea in the first place.

If you really want to get granular then you can calculate the rate yourself based on the company's
financials.

The traditional method I've seen for discount rate analysis when it comes to company valuation is to
throw together a sensitivity analysis chart where you show the effect on your DCF value if you
change your discount rate by 50bps - 100bps.

Usually the analysis commentary goes something like this: "When I apply an 8% discount rate the
Company is worth $20. However, using my sensitivity analysis I can see that if I use a 7%, or even 6%,
discount rate the shares are worth $30-$40!. Therefore, My valuation range is $20 - $40".

The problem with this sort of thinking (that is taught in valuation textbooks), is that it ignores the fact
that for you to have a 50bps - 100bps shift in your discount rate requires a MASSIVE change in the
capital structure. Your discount rate is basically a derivative of your capital structure. Changing your
capital structure like that has implications for your operating model...how much interest you pay,
what your retained earnings look like, etc. So the way I look at it is that its wrong to assume a 1%
move in your discount rate in your DCF without correcting your operating model (through which the
cash flows your discounting are derived from) to reflect the change in capital structure.

Does that make sense?

The reason I advise not to give so much thought to the discount rate is because I think you'll be
better off if you ignore it and just focus on the operating model. I can guarantee you Buffett and
Greenblatt don't lose sleep over the discount rate. Buffett says he doesn't even use discount rates
because the way its calculated leave room for large errors as a result of small input errors. Garbage
in, garbage out.

Higher discount rate implies more leveraged capital structure. That means between the current
structure and the implied higher discount rate structure, the company issued more debt.

Einhorn uses a 20% discount rate as an arbitrary reason, the idea being he wants a 20% return.

Boom.