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Risk Adjusted Discounting Rate - Methods of Computing Cost of Capital
This method is used to establish the discounting rate to be used for a provided project. The cost of capital of the firm will be utilized as the discounting rate for a given project whether project risk is equal to business risk of the firm. If a project has a higher risk than the business risk of the firm, then a percentage risk premium is further added to the cost of capital to verifying the discounting rate that is discounting rate for a high risk project = cost of capital + percentage risk premium. Consequently a high risk project such will be evaluated at a higher discounting rate.
Following details are related to three companies which are identical except in terms of ''''r''''. Company ABC Ltd. MNC Ltd. XYZ Ltd. Cost of capital 10% 10% 10% Earn per Share Rs
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