I am trying to value a food and beverage company using DCF. I have forecasted the short term projections for 10 years and calculated a terminal value there after. But I am confused with which risk free rate to use for calculating cost of equity. I have three options - 1 year T-bill yields, 10 Year Treasury Yields and 30 Year Treasury Yields.
2 Answers
The choice of discount rate should be linked to the payment dates of your cash flows. For cashflows in the near future, use the 3-month T-Bill rates, but for those in 10 years you should use 10-year T-Bond rates. For those in-between, do some sort of time interpolation between 3M and 10Y depending on the time of the cashflow. This is perhaps the simplest correct approach that best uses the limited interest rate data you have.
There's no single best risk-free rate but the 3-month US Treasury Bill is a good proxy for assets valued in USD.