What is the equity discount rate?

The equity discount rate represents the rate at which future cash flows are discounted to determine their present value. In the context of investments, especially in equity (stocks or ownership in companies), this rate reflects the perceived risk and opportunity cost of investing in that particular equity, taking into consideration factors such as market conditions, expected returns, and an investor's required rate of return.

By applying the equity discount rate to future cash flows, investors can assess the value of those cash flows today, which is essential for making informed investment decisions. This process helps investors to compare the attractiveness of different investment opportunities and determine whether an equity investment is worth pursuing at its current price, based on the risk and expected return profile.

Other options do not align with the concept of the equity discount rate. For instance, while interest rates and unsecured investments are relevant to financial analysis, they do not define the function and use of an equity discount rate in present value calculations.