Hi ,
I have a doubt regarding Difference between RDR and Discount rate?
1. As per my understanding, RDR = Risk Free Rate + Risk Premium(Based on CAPM model or any other technique), while investment return is based o the expected return on assets. Investment return is further used to decide the discount rate used to discount Reserves. I am still doubtful about the use of RDR and Discount rate based on Investment return? As per my understanding, RDR is used to discount profit in Pricing while Discount rate is used to discount CashFlows in Reserve calculation? Can you please confirm my understanding and provide more details about it.
2. What is significance of IRR and NPV if we base pricing on RDR?
3. Question 20.2 of 2018 syllabus of ST2 stats that "
The risk discount rate is a measure of the return that the shareholders require on their capital, it has nothing to do with the return that the company can earn on its assets, and hence is irrelevant to a calculation of the reserves."
Can you please provide your comments? Why it is irrelevant?
Last edited by a moderator: Mar 17, 2019