D

Glossary · PSX term

Discount rate.

The discount rate converts future cash into today's value, reflecting time and risk.

Definition

A higher discount rate lowers the present value of future cash flows, so riskier investments or higher interest rates reduce valuations. It is a key, sensitive input in DCF and dividend models.

Worked example

Raising the discount rate from 12% to 15% lowers the present value of a company's future cash flows.

Related on PSX Clarity

Discounted cash flow (DCF)

Dividend discount model

Intrinsic value

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Dividend discount model

The dividend discount model values a stock as the present value of its expected future dividends.

Discounted cash flow (DCF)

DCF values a company by estimating its future cash flows and discounting them to today's value.