RBD - Restaurant Brands

[h2so4]

Oh I thought we were talking about discounted cashflows. Stupid me.

I'd pay more for Coke's cahflow and less for Grandmas. But that's margin of safety. Bigger margin for Grandma aye.

[Sauce]

Oh I thought we were talking about discounted cashflows. Stupid me.

I'd pay more for Coke's cahflow and less for Grandmas. But that's margin of safety. Bigger margin for Grandma aye.

Bingo. So therefore you could have a lower discount rate for coke, and a higher discount rate for grandmas.

[h2so4]

Why? Their cashflows are exactly the same. If you have a lower discount for Coke and a higher discount for Grandma then you wont be able to compare the two.

[Sauce]

Why? Their cashflows are exactly the same. If you have a lower discount for Coke and a higher discount for Grandma then you wont be able to compare the two.

Their cashflows are exactly the same, but you already hit the nail on the head. You would pay more for cokes cashflows due to its greater certainty, and so would others, so you could discount cokes cashflows back to todays value at a lower rate of return (discount rate). This reflects that you are happy to pay more for those cashflows in a higher valuation of them.

By using a higher discount rate for Grandmas, you are building in more conservatism due to the risk. In other words you are demanding a higher rate of return.

i.e. you are paying less for the cashflows of grandmas than you would for Coke by using different discount rates in your valuation, exactly as you said you would.

As Winner said:

what is the likliehood of those $1m cash flows actually be achieved

You have already correctly implied they are not strictly comparable due to differences in quality, so therefore to compare Grandmas & Coke as potential places for your hard earned cash, you actually require different discount rates for each. I think this is partly the point. You actually make them more comparable as a potential investment.

Regards,

Sauce

P.s. Thinking of a discount rate as an investors "required rate of return" might be helpful. If investors are willing to pay more for certainty, then it makes sense to me that a lower discount rate could be used for more certain cashflows and a higher discount rate could be used for less certain cashflows.