Everyone knows that a discounted cash flow (DCF) valuation is highly sensitive to discount rate and growth rate assumptions. However, there still remains huge amount of subjectivity, even in inputs which are typically thought to be clear cut. These are the issues which textbooks don’t address.
Risk Free Rate
The risk free rate is a guaranteed rate of return that an investor can earn from any instrument without taking any risk. Government bonds are often thought to be riskless as it is highly improbable for a government to default given their ability to print more fiat money. Of course, as the Eurozone crisis will tell you, not every government is riskless. Therefore, the most often used proxy for the risk free rate is unsurprisingly the U.S treasury bills. But what tenure should one use?
As you can see, the yields between the 5-years and 30 years differ substantially. Considering ...
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