Why is discount rate 12%?

Question

I understood practically everything except for how the discount rate 12% is derived… (oh no). How can we calculate it and did I miss information on that in the case? Many thanks :)

Answer 1

Hi Tian,

Q: How can we calculate it and did I miss information on that in the case?

The discount rate in a DCF model is the rate of return used to discount the future cash flow. It is normally approximated with the Weighted Average Cost of Capital (WACC) of a company, which implies that, assuming the market is efficient, the more risky the investment, the higher the discount rate.

In a case interview normally it is either given (in this case they mentioned it was 12%) or you can ask if you can approximate to 5% or 10% for simplicity.

For a more technical analysis, you can check this:

▶ How to Find the Net Present Value of a Company

Best,

Francesco

Answer 2

Hey Tian,

Don't worry too much about this - you are ok here! You didn't miss anything :)

In almost every case the discount rate will be told to you. Most often it will be 10%. Sometimes it will be 5 or 15 (and 12% is odd, but not a “problem”)

Discount rate is basically “what return can we get from our money if we invested it elsehwere”. This is different per firm/case but Cost of capital, cost of equity, IRR, interest rate, etc. are all options.

Answer 3

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