In: Accounting
Which of the following equations is correct?
A. Discount rate = Risk-free rate – Risk premium
B. Discount rate = Risk-free rate ? Risk premium
C. Discount rate = Risk-free rate ÷ Risk premium
D. Discount rate = Risk-free rate + Risk premium
Answer is option D,
Ie Discount rate = Risk-free rate + Risk premium
If we remove Beta from CAPM equation (Rf+Beta(Risk premium)), we will reach to above equation.
Risk premium is nothing but Market rate of return (-) Risk free rate