Value Investors, What's Your Discount Rate?
What is the discount rate you use in a DCF? Doesn't have to be value investors only, I mean people/ funds who don't believe that markets are efficient and use beta.
In WACC, you can get the cost of debt and pref shares easily. But how do you calculate your cost of equity? Would love to hear the rationale and how you come to the figure. Do you use your minimum rate of return? Say you want the fund to achieve at least 15%, so you discount the equity portion of all companies you look at by 15%? Or does it vary by the sector/ company you are looking at, say a biotech vs a plastics manufacturer.
WACC on my DCFs vary between 6 and 11% typically, mainly based on the risk profile of the company, it's debt levels, the underlying economics of the business, the overall industry level, etc.
But how do you come up with the cost of equity portion if you don’t use beta?
Didn't read your question through. We use beta and that is one of the key parameters to tweak when finding the right WACC for a company
Ah got it. I’ve heard many people today say they don’t use beta but never go deeper than that. Most of them being value oriented. So just curious what they use.
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