Title:

Should One Assume the Discount Rate to Be One of the Risk Factors?

Group publication title:

Financial Sciences. Nauki o Finansach

Title in english:

Czy powinniśmy zakładać, że stopa dyskontowa jest jednym z czynników ryzyka?

Creator:

Kaczmarzyk, Jan

Subject and Keywords:

corporate finance ; valuation ; DCF ; risk analysis ; Monte Carlo simulation ; finanse przedsiębiorstwa ; analiza ryzyka ; wycena ; Monte Carlo

Description:

Financial Sciences. Nauki o Finansach, 2023, vol. 28, no. 2, s. 1-10

Abstrakt:

The Monte Carlo simulation is the ultimate solution for considering nearly all possible scenarios in presumably any discounted cash flow valuation. This paper argues that a discount rate expresses an investor’s current requirement and should be respectively perceived as a parameter only. The consequences of qualifying a required rate of return (a discount rate) as a risk factor in a discounted cash flow valuation are described in the paper using a free cash flow financial model of an asset being a hypothetical publicly traded enterprise. The case study is a discounted cash flow valuation using the Monte Carlo simulation for risk analysis. The various sets of assumptions are considered to explain the consequences of qualifying a required rate of return in a discounted cash flow model as a risk factor. As indicated in the paper, the discount rate as an additional risk factor with an attributed probability distribution increases the volatility of a risk variable, then the distribution of a risk variable becomes more flattened. In previous studies, some authors indicated that a discount rate could be considered a risk factor in the Monte Carlo simulation (Krysiak 2000; Damodaran 2018).

Publisher:

Publishing House of Wroclaw University of Economics and Business

Place of publication:

Wroclaw

Date:

2023

Resource Type:

artykuł

Resource Identifier:

doi:10.15611/fins.2023.2.01

Language:

eng

Relation:

Financial Sciences. Nauki o Finansach, 2023, vol. 28, no. 2

Rights:

Pewne prawa zastrzeżone na rzecz Autorów i Wydawcy

Access Rights:

Dla wszystkich zgodnie z licencją

License:

CC BY-SA 4.0

Location:

Uniwersytet Ekonomiczny we Wrocławiu