Discount Rate

A discount rate is the rate used to convert future cash flows into present value. In valuation it reflects the risk of those cash flows, so it is usually a cost of capital: cost of equity for cash flows to shareholders, WACC for cash flows to the whole firm.

At an 11% discount rate, $100 received a year from now is worth about $90.09 today, and $100 in two years is worth about $81.16. Raising the rate lowers present value, which is why a higher cost of equity means a lower stock value.

Match the rate to the cash flow. Mixing equity cash flows with WACC, or firm cash flows with cost of equity, gives the wrong answer. The FAQ on cost of equity vs WACC explains when to use each, and the Excel guide shows the discounting formulas. See also cost of capital.