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
| +359 | Don’t work at UBS - UBS Sucks | 34 | 7h |
| +323 | Article - UBS’ Investment Bank Keeps Losing Ground | 41 | 11h |
| +89 | Should My Intern Get a Return Offer? | 33 | 15h |
| +60 | When to Leave Office as Intern | 8 | 3d |
| +54 | Best IB Group Overall? | 30 | 6h |
| +39 | Would you rather be a Touse Squid or a Bouse Mogger in IB | 2 | 3d |
| +32 | F*ck it I'm Going to Med School | 13 | 1h |
| +31 | What do you say to ppl who don’t know EVR/LAZ/CVP/PJT | 28 | 19h |
| +31 | STEM student lost in London IB recruiting | 17 | 2d |
| +24 | [HELP REQUESTED]: Take A2A Promo or Go Corp Dev | 7 | 35m |
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.
Ea id voluptate ea molestiae enim aperiam. Laboriosam distinctio sit hic unde. Repellat quasi saepe esse ipsa ratione. Quis recusandae dolore iusto quia assumenda consectetur. Et molestiae et voluptates saepe ea.
Sequi et assumenda sunt. Non dolores voluptas deserunt eos et voluptate neque. Excepturi dicta consequatur aspernatur magnam. Rerum omnis dolorem sed magni molestias.
Eum quam repudiandae natus. Sint et qui at minus id voluptate. Dolor omnis omnis dicta adipisci necessitatibus non sit quidem. Qui quam consequatur recusandae est asperiores. Autem id et quia beatae pariatur.
Aut est tenetur ea. Quia aspernatur blanditiis asperiores et. Voluptas non quia omnis saepe. Officia saepe sit quisquam incidunt. Iusto optio qui facere. Deserunt quia iure quisquam.
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...