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Discount Rate Calculator

Build a discount rate from the risk-free rate, equity risk premium and project-specific risk.

About Discount Rate Calculator

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.

Formula

Discount Rate

Cost of equity = risk-free + beta × equity risk premium + specific premium; discount rate weights it with debt

specific premium
Extra return demanded for size, illiquidity or project-specific risk
weighted average
Cost of equity and after-tax debt weighted by funding mix

Worked example

With the default values below, Discount Rate Calculator returns Discount Rate of 9.750%. Change any input above and every figure here is recalculated in your browser.

Inputs used

Risk-free rateaccepts 0–100 %
4 %
Equity risk premiumaccepts 0–100 %
5 %
Project or company betaaccepts -2–5
1.2
Size and specific risk premiumaccepts 0–100 %
2 %
Share of funding from debtaccepts 0–100 %
30 %

Results

Discount Rate
9.750%
Cost of Equity
12.000%
Assumed After-Tax Cost of Debt
4.500%
Share of Funding From Equity
70.0%
Interpretation
Typical corporate hurdle rate

Step by step

  1. 1Values used
  2. 2Discount Rate
  3. 3Discount Rate= 9.750
  4. 4Cost of Equity= 12.000
  5. 5Assumed After-Tax Cost of Debt= 4.500
  6. 6Share of Funding From Equity= 70.0
  7. 7Interpretation= Typical corporate hurdle rate

Assumptions and limits

  • The result is derived only from the 5 inputs listed above. Anything not among them is not part of the calculation.
  • In particular, this calculator does not take inflation, tax, fees or charges or compounding frequency into account.
  • Figures are rounded for display to 3 decimal places, so totals built from several rounded parts can differ slightly from the unrounded arithmetic.
  • This is an estimate for general information and not professional financial, tax or legal advice. See the full disclaimer for the limits that apply to this kind of calculator.

How these calculators are built and tested is described on the Methodology page. If a figure looks wrong, please report it.

Frequently Asked Questions

How is Discount Rate calculated?

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.

Why does Discount Rate matter?

The discount rate is the single most influential assumption in any valuation, and building it up from components is what makes it defensible.

What values do I need to enter?

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.

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