Question

Name at least one variable you should consider in determining the correct discount rate to use and explain its role in discount rate determination.

Answer 1

Cost of Equity
Unlike debt, which the company must pay at a set rate of interest, equity does not have a concrete price that the company must pay. But that doesn't mean that there is no cost of equity. Equity shareholders expect to obtain a certain return on their equity investment in a company. Therefore, the cost of equity is basically what it costs the company to maintain a share price that is satisfactory (at least in theory) to investors. T