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Discount Rate |
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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
A discount rate is used to determine the present value of a set of future cash flows. When an analyst wishes to value a company, the company's discount rate is the rate that they expect to earn on investments in their business. The discount rate is commonly used to determine a company's value using a discounted cash flow (DCF) valuation. In a DCF valuation, the discount rate is the rate at which future cash flows are discounted when finding their current value. In that sense, the discount rate is the expected return on future projects within a company.
It is important to note that the discount rate is not a fixed value for any given company, but instead it is a subjective value. No one can determine exactly how much a company will earn on future investments and as such no one could determine the exact discount rate to use during a valuation. In most cases, analysts will use historic figures along with the discount rate of comparable investments when selecting the discount rate to use in a valuation analysis.
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