Myth 4.5: DCFs break down with near-zero risk free rates!
aswathdamodaran.substack.com
In any version of a risk and return model for discount rates, where you start with a riskfree rate as a base and build up to costs of equity, debt and capital, it seems blindingly obvious that as interest rates go lower, discount rates will follow and that value will increase. It is this logic that has led to the hand wringing about how central banks have both created pricing bubbles and made discounted cash flow valuations implode by “lowering’ rates. In a recent article,
Myth 4.5: DCFs break down with near-zero risk free rates!
Myth 4.5: DCFs break down with near-zero risk…
Myth 4.5: DCFs break down with near-zero risk free rates!
In any version of a risk and return model for discount rates, where you start with a riskfree rate as a base and build up to costs of equity, debt and capital, it seems blindingly obvious that as interest rates go lower, discount rates will follow and that value will increase. It is this logic that has led to the hand wringing about how central banks have both created pricing bubbles and made discounted cash flow valuations implode by “lowering’ rates. In a recent article,