Private Equity/Hedge Fund/VC-Manager Interview Questions and Answers

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