Discount Rate
A discount rate is the rate used to convert a future sum of money into its value today, reflecting the time value of money and risk. The higher the rate, the less a future cash flow is worth now. In company valuation the discount rate is usually the WACC; for equity-only cash flows it is the cost of equity.
Worked example
$1,000 received in three years, discounted at 8%, is worth 1,000 ÷ (1.08)³ = $794 today.
Why it matters
The discount rate is the most powerful lever in any DCF: distant cash flows and terminal value are highly sensitive to it. This is why analysts test a range of rates rather than relying on a single number.
Frequently asked questions
Is the discount rate the same as WACC?
For valuing a whole company it usually is. For valuing cash flows that belong only to shareholders, the discount rate is the cost of equity instead.
Related terms: WACC (Weighted Average Cost of Capital), Discounted Cash Flow (DCF), Present Value