Private Equity/Hedge Fund/VC-Manager
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Updated 8 Dec 2015
Q1. what type of discount rates would you use in a DCF model if you were assuming CAPM model to be true
Ans.
Discount rates in DCF model assuming CAPM model to be true
Use the CAPM formula to calculate the cost of equity
Add a risk premium to the risk-free rate
Discount rate = Cost of Equity
Example: Risk-free rate = 2%, Beta = 1.2, Market risk premium = 5%, Cost of Equity = 2% + 1.2(5%) = 8%
Use the same discount rate for all future cash flows
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