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QuestionsCategory: Valuation QuadrantDiscount Rate for US Market – DCF
Ray Titus asked 8 months ago

Hi Team,
Based on DCF module section, it was recommended to use discount rate of long term average yield for 10 year treasury which was 6.51% . Would this still be considered applicable to date since for the past 10 years yield have not exceeded 3.21% ?Also based on current volatility of the yield, what would the most suitable recommendation discount rate to look at?

Looking forward to your advice. Thank you.

1 Answers
Victor Chng answered 8 months ago

Hi Ray,
 
You can use the discounted rate based on your own country risk-free rate. For instance, in Singapore, the risk-free rate is the CPF special account rate at 4%. It will act as an opportunity cost.  
 
For US, the long term treasury rate is about 6% but the past 10 years is only 2.1%. Hence, if you want use 2.1% as the risk-free rate is also visible.

Ray Titus replied 8 months ago

Hi Victor,

Thanks for your prompt response. Much appreciated on the clarification.

Noted that the discount rate is calculated as an opportunity cost and if so, the treasury yield statistically should not impact on valuation of a company. Also based on that input means that to each investor from different country that comes with different risk free rate, DCF valuation might be different although all of these investors invested in the US.

Am I correct to conclude that way?

Victor Chng replied 8 months ago

Hi Ray,

You are right. It depends on the investor in that particular country. Risk-free rate is use as discounted rate because you want to make sure that the investment you make can performed better than your risk-free rate. If it does not perform better then that is an opporuntity cost to it.

Hope this helps :)

Ray Titus replied 8 months ago

Hi Victor,

Noted with thanks again for the confirmation. Much appreciated.

Have a blessed Sunday!

Victor Chng replied 8 months ago

Welcome Ray :)