Because we're using the "free cash flow to equity" method of DCF, we can ignore Charlie's cost of debt and WACC in coming up with a discount rate. Instead, we'll focus on coming up with an assumed cost of equity, using the principles highlighted in the previous lesson.
Charlie's has been in business for more than 60 years, and it has not had an unprofitable year in decades. Its brand is well-known and respected, and this translates into very respectable returns on its invested capital. Given this and the relatively stable outlook for Charlie's profits, settling for a 9% cost of equity (lower than average) seems appropriate given the modest risks Charlie's faces.
Step 3--Discount Projected Free Cash Flows to Present >>