Calculating a company’s discount rate is a crucial step in financial analysis and valuation. It represents the minimum rate of return that an investor expects to receive from an investment in the company. For instance, if a company’s discount rate is 10%, it means that the investor expects a 10% return on their investment.
Discount rates are of utmost importance in a wide range of financial applications, from project evaluations to capital budgeting decisions. Historically, the development of various methods for calculating discount rates has contributed to the sophistication of modern financial analysis.