Why do we use 10% discount rate in upstream oil & gas, and 8% for copper mining projects, and 5% for gold mining projects?
Trending Content - Investment Banking Forum
| +413 | Change My Mind: Banks Shouldn’t Hire Foreigners at All | 111 | 2h |
| +208 | Article - UBS’ Investment Bank Keeps Losing Ground | 34 | 11h |
| +103 | Don’t work at UBS - UBS Sucks | 13 | 1h |
| +80 | An Exhaustive Guide: How to Solve Every Single Accretion/Dilution Question | 7 | 4h |
| +52 | When to Leave Office as Intern | 6 | 32m |
| +43 | Best IB Group Overall? | 25 | 1d |
| +34 | Would you rather be a Touse Squid or a Bouse Mogger in IB | 2 | 2d |
| +31 | What do you say to ppl who don’t know EVR/LAZ/CVP/PJT | 22 | 1d |
| +31 | STEM student lost in London IB recruiting | 17 | 21h |
| +20 | Still recruiting SA'27 | 13 | 20h |
Career Resources
.
It’s mainly because of the “risk” that is present in each industry. Also the risk to reward ratio or expectations that you get in each of those industries. For example, O&G is very risky or a highly volatile market, also can be highly cyclical, therefore the discount rate is higher at 10%. Now copper mining isn’t as volatile or risky as O&G so therefore is would be moderately volatile/risky and its discount rate would be lower because of that at 8%. Now gold which is considered a very safe investment which is not volatile at all what so ever and which is also considered like the safehaven of investments because of its stability and gains during crisis, it’s going to have an even lower discount rate of 5%. Can you see a pattern here! All these industries discount rates are correlated with the risk/volatility that they present and also the risk/reward expectations. So when risk is higher discount rate is higher, when risk is lower, discount rate is lower in this scenario (directly proportional). So overall I’d say that the discount rate is mainly impacted by risk and reward expectations but also other things impact it like regulation/regulatory impacts on each industry.
I am aligned to your thought process but why precisely 10% for O&G, why not 12% or 9% ..
Simple round number and at this point is industry standard. It's all gut feeling anyway
Equity cost of capital can't be calculated using CAPM or DDM because it's a finite resource instead of an infinite going concern. Also, it's generally very difficult to value reserves so it's back of the envelope calc.
Quisquam enim incidunt est tempora ut aut et distinctio. Voluptatum atque eius libero. Quaerat explicabo inventore quo optio earum consequatur voluptatem. Perspiciatis eius possimus quasi velit corrupti voluptatem. Magni laboriosam neque explicabo fugit assumenda ipsa quia. Nemo cupiditate perspiciatis vel suscipit beatae ut autem sint. Eum minima blanditiis dolore inventore non.
Quos et molestias illum dicta. Possimus quia quam et ut sed ut dolores dolore.
Animi provident aut quam voluptatem. Deleniti minima culpa est et. Et error illo doloremque tempora doloremque. Sequi similique doloribus perspiciatis molestias. Voluptates aliquid eum voluptatum rerum nesciunt veritatis. Distinctio tempore iusto libero dolores.
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...