Discounted free cash flow for the firm (FCFF) should be equal to all of the cash inflows and outflows, adjusted to present value by an appropriate interest rate, that the firm can be expected to bring in during its lifetime.

## Why do you discount FCF?

This cash flow is taken before the interest payments to debt holders in order to value the total firm. … The operating free cash flow is then discounted at this cost of capital rate using three **potential growth** scenarios—no growth, constant growth, and changing growth rate.

## What discount rate does the free cash flow model use?

2) The discount rate. This is the rate at which you discount future cash flows. The discount rate is by how much you discount a cash flow in the future. For example, the value of $1000 one year from now discounted at **10%** is $909.09.

…

Discounted Cash Flow: What Discount Rate To Use?

Required Annual Return (Discount Rate) | Value of Contract |
---|---|

20% |
$5,000 |

## Which valuation method is best?

The **dividend discount model (DDM)** is one of the most basic of the absolute valuation models. The dividend discount model calculates the “true” value of a firm based on the dividends the company pays its shareholders.

## Which is better FCFF or FCFE?

When the company’s capital structure is stable, **FCFE is the most** suitable. … Therefore, using FCFF to value the company’s equity is easier. FCFF is discounted so that the present value of the total firm value is obtained, and then the market value of debt is subtracted.

## What should I use as discount rate?

Individuals should use **the opportunity cost of putting their money to work elsewhere** as an appropriate discount rate —simply put, it’s the rate of return the investor could earn in the marketplace on an investment of comparable size and risk.

## What is a good discount rate to use for NPV?

It’s the rate of return that the investors expect or the cost of borrowing money. If shareholders expect a **12% return**, that is the discount rate the company will use to calculate NPV.

## What is the best discount rate to use?

Usually **within 6-12%**. For investors, the cost of capital is a discount rate to value a business. Don’t forget margin of safety. A high discount rate is not a margin of safety.