How do most Asset Managers in Equities get their discount rate?
Do they use basic textbook stuff like CAPM?
How about Arbitrage pricing model or the Multi-factor model?
EDIT: For fundamental bottom up managers.
Maybe if i comment on my own post, someone will...
It depends on the asset manager? Multi-factor models are definitely popular among quant asset managers.
What about a fundamental bottom up manager.
The discount rate is more for theoretical finance than for fundamental analysis. CAPM, Fama French, multi-factor, arbitrage pricing, etc. do not come up at all where I work.
Even though a DCF theoretically calculates intrinsic value, the output is so sensitive to assumptions that in practice a DCF actually becomes more useful as a check on your assumptions (or back-solving for assumptions embedded in the current price) than as a calculation of value. You could then test the sensitivity of the discount rate in the same way you would for your other assumptions.
wonderful.
It is the return they want to exceed on their investments. Agree with the guy below that it is mostly just a check that DCF guys use to benchmark.
If I run a DCF and say hey wow using my standard 10% discount rate I get a pretty substantial discount to fair value, this could be interesting. Honestly the guys who claim to invest on DCF "intrinsic value" or some analog I would love to get inside of and hear the real conversations. They know that the intrinsic value is BS because they know that their long-term assumptions are hopelessly inaccurate.
Maybe I am being a bit harsh. I suppose that you could consistently stay conservative on long-term assumptions and feel pretty good about your intrinsic value.
Anyway IMO when you hear a manager talking intrinsic value and DCF valuations then you should understand that the investment process tends toward a contrarian "buy the big dip" mentality.
I feel the same way about DCF, it seems like many people see it mostly as a waste. Yet we still have to use it once in while because it's just corporate standards.
How does Credit Suisse determine discount rate when valuing equities? (Originally Posted: 05/19/2016)
I read their report on Celgene and they use 8%. It seems low. I calculated using CAMP/WACC that it should be around 12%.
You mean equity analysts massage their assumptions to justify price targets that they've already set in their mind? No way.
12% sounds very high for WACC though. WACC is generally 10% in most developed markets.
Not really an expert at all, but don't biotech equities tend to have a >10% WACC?
lmao you ask your analyst which WACC to use, that's how
WACC is BS anyway. Technically, you can come to any number you want, so it's not worth wasting time why somebody came to number X or number Y.
Repellendus harum molestias qui vel. Molestiae nulla dolorum ea voluptas ut. Consequuntur facere maxime vel non. Perspiciatis deserunt pariatur non expedita autem. Nobis adipisci et reprehenderit dolores molestiae quibusdam. Praesentium et hic autem ad excepturi at sequi. Enim blanditiis tempore sit quidem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...