Discount rate in DCF
Buffett and a Columbia professor (forgot his name) said just use something like 10% as discount rate, but is that discount rate applied to FCF to equity? or FCF to the firm?
So if I discounting FCFF using WACC, if the firm has 40% debt, is the WACC = 40% (debt cost) * (1-tax rate) + 60% (10%)? Am I making sense? Tks.
I dont know what the above mentioned guys talked about but I will assume they were talking about discounting 10% to every cash flowing in (FCFF).
Although most of the discount rates for all companies fall around 10% discount rate, each firm is different meaning a deviation in the rate. Please do research on similar firms and apply similar rate (for doing surface level dcf).
Meaning:
40%[Cost of Debt (which has tax deduction built-in)] + 60%[Cost of Equity( x rate)] = 10%
this is incorrect - buffet uses the 10 year treasury yield in DCF to arrive at Fair Value and then he buys at a huge discount to that. The theory is that he is basically buying an asset with a risk profile of a 10 year treasury with a yield of 10%+ basically.
That is why I said, I don't know what those guys do. Could you explain further or link something as how he comes to the fair value? I am just interning at a new shop now, don't habe the grasp of all the valuation methods.
Thank you.
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