Question

Hi. What do you think about using 30-year treasury bond rate as riskfree rate in calculating cost of equity? Or using average riskree rate, not current. Especially for calculating terminal value it seems reasonable to me. Current riskfree rate is temporary and can be volatile. When I am discounting cash flows to infinity, why not to use riskfree rate that is more sustainable? No too low, or too high...

Answer 1

Unlike the other inputs into valuation, the riskfree rate represents a real opportunity cost: what you can make if you invest your money in a riskfree investment today. Thus, you should always use today's riskfree rate in valuation, since that represents your opportunity cost.

Answer 2

Proff Damodaran,in your book I've read about risk-free rate. You said, that we can also use the rate of 20 or 30 year maturity bonds, but the only problem is less availability on data for this bonds, than 10 years.

Answer 3

Use the 10 year bond. I do it all the time.