Private Equity/Hedge Fund/VC-Manager

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

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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