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What discount rate should you use for your occupier decision analysis?
By: Colliers | Houston
When choosing a discount rate for occupier analysis, one should consider the risk associated with the cash flows, the type of company, the company's industry and the occupier's cost of capital. Corporate and non-corporate (individuals, partnerships, or sole proprietorships)
Non-corporate occupiers typically use their opportunity cost to evaluate their occupancy options. A non-corporate user considers the alternative uses for the funds and the returns on those alternative uses. An obvious alternative is to invest it in their business.
Corporate entities typically use their weighted average cost of capital (WACC), which can also be called the "hurdle" or "threshold" rate, or they may choose to use their borrowing rate (for lower-risk cash flows) and their cost of equity capital (for higher risk cash flows).
The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital, in which each category of capital is proportionately weighted by the percentage of debt and percentage of equity. All sources of capital, including common stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation. Unfortunately, it is not a simple calculation, and there are various approaches to calculating it. For example, one could use the "historic" approach, which uses the existing debt-to-equity ratio and existing after-tax cost of capital, or one could use the "marginal" approach, which uses the existing debt-to-equity ratio and the projected after-tax cost of new capital...
See the full article here: https://www.colliers.com/
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