tag:blogger.com,1999:blog-8152901575140311047.post7664555676053068681..comments2023-03-31T09:35:36.590-04:00Comments on Musings on Markets: Myth 4.4: The D(discount) rate is a receptacle for your hopes and fearsAswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8152901575140311047.post-47727427475917849802019-03-02T13:24:41.990-05:002019-03-02T13:24:41.990-05:00"If you are interested in extending your prob..."If you are interested in extending your probabilistic arsenal, try this paper that I have on the topic."<br /><br />Hi Professor Damodaran,<br />Thank you for sharing your thoughts on the blog post. In the post you have shared the link to a paper title <br />"PROBABILISTIC APPROACHES: SCENARIO ANALYSIS,DECISION TREES AND SIMULATIONS"<br /><br />In the example for the Drug Development a thorough Decision Tree is shared, would you be willing to share the excel sheet for the same or share the link if you have publicly available? <br /><br />Thank you for your consideration. <br /><br />AG<br />Anonymoushttps://www.blogger.com/profile/13315068140997044191noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-84381771257796023072016-11-06T22:22:18.963-05:002016-11-06T22:22:18.963-05:00Prof,
I completely agree with this myth. If anyth...Prof,<br /><br />I completely agree with this myth. If anything, r (discount rate) is an external factor, not bottom-up specific factor.<br /><br />Though, I use discount rate a bit different with the academia world. To me, discount rate is ALWAYS about "opportunity costs", which is a very subjective matter -- the availability of best opportunity out there changes everyday, and it also depends on the size of your investment (the opportunity costs for $1,000,000,000 and $1,000 are substantially different).<br /><br />On the going-concern risk and management quality, I think the best place to factor in in DCF is the terminal g (growth rate). Since terminal value = [FCF/(r-g)], so g is like the de facto adjustment to the discount rate for the going-concern risk and management quality. One is willing to pay lower [r-g] for predictable businesses and vice versa (VC can even go with negative g if they want to). That solves the double-counting problem.Fung C.F.noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-50101138328565261632016-11-06T04:47:55.735-05:002016-11-06T04:47:55.735-05:00I think the way we communicate Value has to be cha...I think the way we communicate Value has to be changed. DCF value is mean value of all the possible scenarios. It is the Expected value of value distribution curve. We should also calculate std. dev. of that value curve and use mean and std dev together to communicate or attach some confidence level to the number. As In above example there r two scenarios used to reach the mean value. Even in normal circumstances we should incorporate the volatility of risk free rate volatility of equity premia volatility of terminal growth volatility of parameter Beta in our assumptions and create a value curve instead of just one mean value.. so that real value doesn't surprises our calculations... Gautam Jainnoreply@blogger.com