In the Discounted Cash Flow module, we have a Discount Rates tab. This tab allows the user to compute an appropriate discount rate to use in the project valuation. For instance, the two subtabs are:
- Weighted Average Cost of Capital (WACC). This is an optional set of analytics whereby you can compute the firm’s WACC to use as a discount rate (Figure 9.1). Start by selecting either the Simple WACC or Detailed WACC Cost Elements. Then, you can either enter the required inputs or click on the Load Example button to load a sample set of inputs that you can use as a guide for entering your own set of assumptions.
- Beta. This is another optional subtab used for computing the Beta risk coefficient by pasting in historical stock prices or stock returns to compute the Beta (Figure 9.2). The resulting Beta is used in the Capital Asset Pricing Model (CAPM), one of the main inputs into the WACC model. Start by selecting whether you have historical Stock Prices or Stock Returns, then enter the number of Rows (periods) of historical data you have and Paste the data into the relevant columns, and click Compute. The Beta result will update, and you can use this Beta as an input into the WACC model.
TIPS on WACC and BETA
In the Discounted Cash Flow module, the WACC and BETA calculations are available under the Discount Rate subtab of the main DCF tab.
When deciding on the periodicity and length of historical stock price data to use, we recommend using daily stock prices with an historical period either commensurate with the Project’s analysis period or a representative period in the past (similar risks and market conditions in the past that are expected to repeat themselves in the near future).