A private equity investor calculates a discount rate of 40% for valuing a company. The investor, however, believes that there is a 20% chance that the company will fail in any one year. The most appropriate adjusted discount rate the investor should use is: A) 48.0%. B) 75.0%. C) 50.0%. Your answer: C was incorrect. The correct answer was B) 75.0%. The discount rate adjusted for the probability of failure is calculated as follows: r* = (1 + 0.40) / (1 − 0.20) − 1 = 0.75 or 75% I am having trouble retaining this formula, proborably b/c the likelyhood of this being tested is small. I was trying to figure out how it is derived in order to help me remember it and could not get it. anyone know?
1+ discount / 1- prob