Question

Dania Incorporated is growing at a rate of 4% per year. The current level of inflation is 3% per year and the GDP of the country is growing at 2.5% per year. Investors in the company expect a return of 9% per year while the current risk-free rate of return is 1.5% per year. What is the discount rate you should use when you are doing a discounted cash flow analysis to determine the value of shares for the company?

Answer 1

the discount rate you should use when you are doing a discounted cash flow analysis to determine the value of shares for the company is 9% which Investors in the company expect as return on their investment.

this is because the purpose of doing a discounted cash flow analysis to determine the value of shares is for investors to determine whether the value of shares of the compnay is overvalued or undervalued compared to its market price of shares.

level of inflation, GDP growth rate and risk-free rate of return are all included in investors expected return.