“Normalized” Risk-Free rate: fiction or science fiction?
16 Pages Posted:
Date Written: October 10, 2020
As interest rates on Government Bonds have decreased, some analysts and consultants in Europe and in the US are using what they call “Normalized Risk-Free rate”.
We show several inconsistencies and errors in the use of “Normalized Risk-Free rate”.
Section 5 is a short case that may be used in class. It contains 26 interesting comments.
Keywords: Normalized Risk-Free rate; normalization; company valuation; WACC; required return to equity; discounted cash flow
JEL Classification: G12, G31, M21
Suggested Citation: Suggested Citation