Just learning DCF and was told discount rate represents the risk of the future cashflow. How exactly is WACC an accurate representation of risk? I feel like an idiot for not being able to wrap my head around this
| +116 | I think I’m logging off after ER visit | 23 | 14h |
| +97 | Article: UBS Quietly Hollowing Out Its Onshore Workforce and Rebuilding the Bank in India | 25 | 6d |
| +94 | Is it Bad That I ALREADY Don’t Care? | 29 | 9m |
| +88 | Senior Banker's Guide to IB Recruiting / Group Placement (with a Healthcare Bent) | 10 | 1h |
| +80 | AI Creating More Work | 27 | 8m |
| +59 | Consulting Son or CorpDev Daughter? | 6 | 4d |
| +55 | Shit PWP Culture | 40 | 5h |
| +44 | How easy was recruiting for you? | 21 | 4d |
| +36 | 22yo IB Analyst just had mental health breakdown | 11 | 1d |
| +26 | How tf do i control a stutter? | 13 | 2d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Don't feel like an idiot! Everyone starts somewhere.
When you perform a DCF analysis, most of the time it is based on discounting free cash flow to the firm. Since this type of cash flow is attributable to both debt and equity holders, you have to discount it by a rate that appropriately represents a mix of costs of debt and equity, which is your WACC.
Costs of capital reflect the amount of risk both equity and debt financers take on. If you are a highly leveraged firm, or you operate in a risky industry, it's likely the debt you take on would be at a higher interest rate and your equity holders would demand a higher return. Hence, the WACC represents your costs of debt and equity capital that's weighted by the proportions on your capital structure.
Hope this makes it clearer.
Animi deleniti ab veniam et iste harum voluptatem. Quo commodi et et fuga omnis. Tempore magnam vel iusto aut sed dolorem. Nemo est nihil quo animi nobis rerum dolores.
Nemo est voluptatem odio asperiores deleniti itaque saepe. Earum ducimus facere accusamus est et. Dolore consequatur vel velit vel aspernatur aut eligendi. Illum facere ut provident dicta. Aut dolorum sunt a quo eligendi laboriosam voluptas corrupti.
Sed dolor sequi reiciendis fugit a cupiditate. Et quae expedita dolores ad.
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...