Fundamental analysis
Discount rate
Definition
The yearly return you require for the risk of owning the business. Analysts often use the weighted average cost of capital (WACC); individual investors often use their own required return.
Example
Say company XYZ is funded 60% by equity, on which investors expect 10% a year, and 40% by debt costing 5% after tax. Its WACC is 0.6 × 10% + 0.4 × 5% = 8%, so an analyst might discount its cash flows at 8%. An individual investor who wants 12% to own a business this risky would use 12% instead and arrive at a lower value.
Hypothetical numbers, for illustration only.
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