# How do companies determine the rate to discount their cash flows? - 12841

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## illusionist

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1.    How do companies determine the rate to discount their cash flows?  For example, UPS uses a Weighted Average Cost of Capital to determine what rate to discount future cash flows.  What factors do you think UPS would consider determining their WACC? What about Ariba, since they have no long term debt?

2.    I've put together an amortization schedule that shows the total amount paid if payments are made annually and monthly. What variables do you need to modify to calculate a quarterly payment? (Here’s the sources for this to help answer this question. http://www.mediafire.com/?phmba7poj0vsqht)

3.    I remember when I was a kid (about to date myself) there was a cartoon called Ducktales.  Uncle Scrooge traveled to this island that had no concept of money.  Which he just couldn't accept, so he managed to make bottle caps a currency.  Initially there was only one bottle cap and it was VERY valuable and gave the holder of the bottle cap significant purchasing power.  Uncle Scrooge saw this as a problem, so he flooded the market with bottle caps so everyone had access to currency.  The islanders suddenly needed wheelbarrows of bottle caps for a loaf of bread.  Obviously, this is an example of inflation.  So here's the question, how does the Federal Reserve use the federal funds rate to keep us from needing wheelbarrows of dollars for a loaf of bread?

4.    If you were financing a car based on the following information, what is your monthly payment:
Car Cost = \$20,000
Loan Period = 5 years (payments made monthly)
Interest is 5% (annual interest rate)
Payment = ?
What if you changed the Loan Period to 3 years (payments made monthly)?

5.    Why is it important to divide the annual interest rate by the number of periods we are making payments?  For example, if the payment is monthly, we would have 12 periods and we would divide the interest rate by 12.  If the payments were quarterly, we would have 4 periods and we would divide the interest rate by 4.

6.    Gitman discusses the Basic Valuation Model for bonds.  How can you use this formula to validate the market price of a corporation's bonds? (Here’s the sources for this to help answer this question. http://www.mediafire.com/?k313u8ypy5hm9zx )

Solution Description

1.    How do companies determine the rate to discount their cash flows?  For example, UPS uses a Weighted Average Cost of Capital to determine what rate to discount future cash flows.  What factors do you think UPS would consider determining their WACC? What about Ariba, since they have no long term debt?

Companies determine the rate by using weighted average cost of capital. They add the cost of equity to cost of debt after weighing them in accordance with the proportion of the total capital. Companies that do not have debt, consider cost of equity only. Cost oe equity is determined using the capital asset pricing model.

2.    I've put together an amortization schedule that shows the total amount paid if payments are ma