What is a typical range for discount rates used in DCF analyses?

In discounted cash flow (DCF) analyses, the discount rate is critical as it reflects the opportunity cost of capital and the risk associated with an investment. The typical range for discount rates can vary significantly based on factors such as the specific industry, the overall economic environment, and the perceived risk of the cash flows being analyzed.

The correct choice identifies a range of 8% to 12% as typical, which aligns well with common practices in finance. This range takes into consideration the weighted average cost of capital (WACC), representing the average rate that a company is expected to pay to finance its assets, which often falls into this spectrum for many stable businesses. Additionally, within this range, companies can further differentiate based on their risk profile and industry characteristics. For instance, more stable companies in less volatile sectors might gravitate toward the lower end, while companies in more risky or cyclical industries might require a higher discount rate to account for that increased risk.

This option accurately captures the nuances of how discount rates can fluctuate, providing a realistic framework for practitioners when conducting DCF analyses. Adjustments may be made based on specific company data or scenarios, but the stated range provides a solid baseline that reflects general market conditions and investor expectations appropriately.