Value investing · Course 31 of 39 · Valuing a business
What a discount rate can be
Pick a beta, a premium and a cost of debt, then defend them: four measured betas for one company, three routes to a premium, and where one rate breaks.
The first cost of capital course ends by saying that the three routes to an equity risk premium disagree by design, and refuses to recommend one. That is correct and it leaves a reader unable to act.
This course does not recommend one either. It teaches the skill that replaces the recommendation: choose your inputs deliberately, write down which you chose and why, and know what the choice is worth in the answer.
Seven lessons. What the capital asset pricing model claims and what the tests found. Four defensible betas for one company, from the same prices. What happened to the size premium when it was re-examined. How to state a premium with its route and its date attached. Building a cost of debt from what the company actually pays. Stripping leverage out of a beta and putting a different one back in. And the cases where a single blended rate is the wrong instrument.
It assumes the first cost of capital course and a working knowledge of what a discount rate does to a valuation.
The model, not your inputs
What a discount rate can be is 7 lessons on how a valuation is built and which assumption it really turns on. Every input is still yours to supply, this course supplies none of them, and a model with no company in it produces no number you can act on.
Related
- Where each WACC input comes from is the first course's map of where each of the five inputs is read from.
- The equity risk premium sets out the three routes to a premium and declines to pick one, which is where this course starts.
- WACC calculator is the calculator every figure in this course can be checked in.
See our methodology for how the product reads a filing and what it refuses to compute.