Quick User Guide

How do we calculate the Cost of Equity/Discount Rate?

The riskier an investment is, the higher the rate of return it must have. Capital Asset Pricing Model (CAPM) calculates a suitable rate of return (discount rate)  for an investment. CAPM takes the market’s expected return and the volatility of the investment into account to calculate the discount rate. It is also known as the cost of equity. Discount Rate or Cost of equity is a necessary part of any asset’s valuation.  

How do we calculate the Weighted Average Cost of Capital (WACC)?

The riskier an investment is, the higher the rate of return it must have. Capital Asset Pricing Model (CAPM) calculates a suitable rate of return (discount rate)  for an investment. CAPM takes the market’s expected return and the volatility of the investment into account to calculate the discount rate. It is also known as the cost of equity. Discount Rate or Cost of equity is a necessary part of any asset’s valuation.  

Tips to set value for the input parameter

You can use different values to simulate different market condition. Making multiple scenarios is a very useful technique since market conditions can change any time. Create 3 scenarios (Best/worst/Normal) while valuing an asset. You will be mentally prepared for each scenario and understand the overall risk and reward. 

• Stock’s Beta: Use  any (1Y/3Y5Y’s) Monthly Beta of the stock. Beta = 1, means same as market
• Risk Free Rate: You can use current 10/30 year’s Treasury/Government bonds yield. This value can vary a lot based on the country/region.
• Markets Annual Return: Use historical Market’s Average Annual Return (i.e. USA market returned  between 7-12%). Other market/region have their own historical return.