Four labels before entering a percentage
Identify whether the recipient is the whole business or equity owners, then state cash-flow currency, included inflation and payment timing. A nominal rouble flow and a real rate in another currency do not become consistent because both are percentages. Currency conversion requires a coherent assumption set, not a column-name substitution.
Timing matters: a year-end flow discounts differently from an even-year flow. Better timing precision does not make a weak sales forecast reliable. Formula precision is not forecast precision.
Inflation check
Suppose 110 conditional currency units are expected in one year in nominal terms. Educational real required return is 4% and inflation is 5%. Consistent nominal rate is 1.04 × 1.05 − 1 = 9.2%, not 9%.
Present value of 110 is 110 / 1.092, about 100.73. Alternatively remove inflation to get about 104.76 and divide by 1.04. The result is the same. Using 4% directly on nominal 110 gives about 105.77, overstating value by mixing bases.
Horizon changes error impact
At a constant educational rate of 10%, the discount factor is about 0.9091 for one year and 0.6209 for five years. Thus the same 100 at year one and year five have different present values. These figures do not prove receipt probability or set a real issuer’s rate.
For changing annual rates, use the product of factors, not an arbitrary average. A detailed curve can create an appearance of knowledge about the future; when data are scarce, a transparent range of simple scenarios can be better.
Risk premium is not a promise
Required equity return may be described as a base rate plus a risk premium in a chosen model. Historical, analyst-estimated and implied premiums answer different questions. None means the investor will receive that addition. Record date, method and scope.
Do not add the same uncertainty as both a cash-flow reduction and a rate premium without explaining the mechanism. This is not a ban on multiple risk components; it is a ban on hidden double punishment. Cash flows and rate must describe one compatible scenario.[94](#source-cv-cashflows)
Do not mix financing price with project risk
The rate on one loan describes one contract, not the whole business cost of capital. Security, conditions and term may differ. Equity owners face different requirements and uncertainty. Do not insert a loan rate into every discounting cell simply because it is the only number available.
Distinguish contractual facts from analyst estimates. Contractual terms can change at refinancing; estimates need method and range. If later capital will be raised on unknown terms, represent that in scenarios rather than hiding it in a current average. Check the duration of the base rate and cash flow.
WACC and a conditional tax effect
For an ordinary non-financial firm with two financing sources, WACC=ke×E/(E+D)+kd×(1−T)×D/(E+D). E and D are market values of equity and interest-bearing debt; ke is required equity return and kd marginal pre-tax cost of comparable new debt. NYU’s lecture uses market weights and after-tax debt cost; this is not an average of historical coupons.[1](#source-gv-dcf-lecture) The formula applies to FCFF before debt service, not dividends or FCFE.
Use only educational values: E=600 million roubles, D=400 million, ke=14%, kd=9%, T=25%. T is fictional, not a current Russian rate. Weights are 0.60 and 0.40. After-tax debt cost is 9%×0.75=6.75%. WACC=14%×0.60+6.75%×0.40=11.10%. A conditional annual check is 84 million equity return plus 27 million after-tax debt cost, 111 per 1,000 million capital.
Without the tax effect, T=0 gives 12%; the difference is 0.90 percentage points, not 25% of total capital cost. Tax-base availability, taxable profit, interest limits and timing require separate checks. In a loss-making business, 1−T does not prove immediate savings.
At D=0, ke remains 14%. At E+D=0 weights are undefined; negative book equity cannot replace market E. Mechanical E=0 gives 6.75% but does not establish fully debt-funded financing with the same risk. More debt can change equity risk, lender terms and WACC suitability. Market weights today and target steady-state weights are different assumptions.
Keep a rate passport
Record recipient, currency, inflation, financing structure and source of every assumption. Test sensitivity to reasonable changes without calling the range a statistical confidence interval. A correct rate makes the model honest but does not remove forecast risk or guarantee a sale price. See [discounted cash flow](/guides/discounted-cash-flow/) and [inflation and real return](/guides/inflation-real-return/).