Build a discount rate from the risk-free rate, equity risk premium and project-specific risk.
The capital asset pricing model gives the cost of equity, and blending it with after-tax debt by funding weight gives the weighted average cost of capital. Debt is cheaper because interest is deductible, which is why gearing lowers the rate. The discount rate is the single most influential assumption in any valuation, and building it up from components is what makes it defensible.
Discount Rate
Cost of equity = risk-free + beta × equity risk premium + specific premium; discount rate weights it with debt
Cost of equity = risk-free + beta × equity risk premium + specific premium; discount rate weights it with debt The capital asset pricing model gives the cost of equity, and blending it with after-tax debt by funding weight gives the weighted average cost of capital. Debt is cheaper because interest is deductible, which is why gearing lowers the rate.
The discount rate is the single most influential assumption in any valuation, and building it up from components is what makes it defensible.
This calculator takes 5 inputs: Risk-free rate, Equity risk premium, Project or company beta, Size and specific risk premium, Share of funding from debt. The pre-filled defaults are a realistic starting point — replace them with figures from your own environment for a result you can act on.