I am still trying to wrap my head around the difference between these two rates. I have looked up the difference online and all they say is that “you use discount rate for periodic earnings while you use a single period for the cap rate”. My question is: Why not use the required rate of return on a single point in time instead of pulling out the cap rate? What is the diference between the required rate of return and the cap rate. If someone can explain this in a very practtical anf theoretical way, I’d very much appreciate it.
In discounted cash flow models involving the entire firm – FCFF, for example – the cap rate is (WACC − g).
In discounted cash flow models involving only equity – FCFE, Gordon Growth, and residual income, for example – the cap rate is (rCE − g).
With cap rate you mean capitalization rate? Because the cap rate I know is used in real estate valuation.