The DCF, part two: the cost of capital
By the end of this lecture you will be able to
- Estimate the cost of equity with CAPM, choosing the risk-free rate, the equity risk premium and beta
- Unlever and relever peer betas, and judge when to add size or country risk
- Estimate the cost of debt and the target weights, compute a WACC and explain why it falls then rises with leverage
- Keep the discount rate consistent with the currency, inflation and terminal value, and contrast a mining NAV rate with a WACC
Last lecture we discounted a company's cash flows at 9% and took the number on trust. Today we earn it. The discount rate is the return investors require for bearing the risk of those cash flows, and it moves a DCF more than any other input. We build it from market data step by step: the cost of equity, the cost of debt, the weights, and the checks that keep it consistent with the cash flows it discounts.
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