What key factor influences the discount rate in a DCF model?

The discount rate in a DCF (Discounted Cash Flow) model is primarily influenced by the risk-free rate plus a risk premium. The risk-free rate represents the return expected from an investment with zero risk, typically associated with government bonds. The risk premium is added to account for the additional risk associated with investing in a specific company or project compared to that risk-free investment. This additional risk may be due to various factors such as the company's volatility, market conditions, or the industry it operates in.

When calculating the discount rate, investors seek to ensure that they are compensated for the inherent risks involved in future cash flows. Therefore, combining the stable risk-free rate with the necessary risk premium accurately reflects the expected return required by investors to justify the risks associated with the investment.

Thus, this option presents the essential components of the discount rate, capturing the necessary trade-off between risk and return expected in an investment.