# Which Discount Rate - HELP

Right, got two q’s here same concept DDM and they use different discount rates for each Q. Can someone please explain why? The first one uses WACC and the second uses Ke. Metiu Metev, an analyst with Sofia Equity Researchers, has gathered the following information about Balkan Steel Mills (BSM): Current year’s operating free cash flow BGN 5 million Cost of equity capital 15% Weighted average cost of capital 12.4% Estimated long-term growth rate 6% Given this information, Metev’s best estimate of BSM’s intrinsic value (in BGN millions) would be closest to: A. 55.56 million. B. 58.89 million. C. 78.13 million. D. 82.81 million. ------------------------------------------------------------------------------------------------------------------ Geo Telecommunications Inc. is a fast growing company with a double-digit growth rate that is expected to continue for three more years. In his pursuit of valuing the company’s stock, Dimiter Nenkov, a free-lance equity analyst, has compiled the following data about the company: Current year’s free cash flow to equity €20 million Growth rate in free cash flow during the next three years 30% in years 1 and 2 20% in year 3 Growth rate in free cash flow for year 4 and beyond 8% Weighted average cost of capital 12% Cost of equity capital 15% Number of outstanding shares 50 million Based on the above information, Nenkov’s best estimate of the value per share for Geo Telecommunications would be closest to: A. € 9.72. B. € 10.13. C. € 17.17. D. € 17.57. The calcs are fine but it’s just which rate to use. So the once again the first one uses WACC and the second uses Ke, why is there this discrepency, it’s driving me crazy!!!

the first uses WACC because they are talking about FCFF the second uses cost of equity because they are talking about FCFE

Ah, thanks map, so generally would we always use WACC? Unless it’s FCFE

yes. I have not seen this kind of discounting in any of the CFAi texts, but it should be just like calculating the fair value of the stock given dividends, nothing more complicated than that.

The calculations are pretty straightforward… I got caught out on both discount rates tho… Anyway thanks for your help

What are the answers? For teh first one I get B. The second one looks weird…

Dreary check this out for the second one: http://www.analystforum.com/phorums/read.php?11,758062