what are some factors a finance manager considers in choosing an app
QUESTION
what are some factors a finance manager considers in choosing an appropriate discount rate.? thank you
The discount rate is an interest rate used to determine how much future cash flows are worth today. Discount rates are used in valuation analysis when cash flows are expected to receive over long-periods of time. The discount is expressed as an annual percentage and is one of the critical components in discounted cash flow analysis for stock valuation.Choosing an Appropriate discount rate:Some of the factors involved in choosing a discount rate include:1) What it costs you to acquire the money to invest as your return must surpass this cost for the investment to be worthwhile.2) What return would you expect to earn in an alternative
tment (Opportunity cost)3) How you expect to be compensated for risk (Business, inflation, financial)Mostly the minimum discount rate used is 10%. Very conservative value investors will often use 15%. Other investors may choose a discount rate based on the market capitalization of the company under consideration. Therefore, the discount rates are choosen as:* 13% 15% for small-caps* 11% 12% for mid-caps* 10% for large caps
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