Discount rate

The annual return an investor requires for putting money at risk, and the rate at which future cash flows are converted back to today.

For an equity cash flow it is the cost of equity: a risk-free rate plus a premium for bearing equity risk, scaled by how much of that risk this particular business carries. At a 7% risk-free rate, a 5.5% equity risk premium and a beta of 1.1, the cost of equity is 13.05%.

For a cash flow that belongs to lenders and owners together, the rate is the weighted average cost of capital.

Match the rate to whose money the cash flow is.