Abstract
Discount rate, risk premium, and expected return are important different concepts, and should not be confused. Discount rate is the key to capitalization. Liu(2009) proves that the discount rate, cost of equity, is not measurable. No discount rate, no capitalization, no firm value, no Net Present Value (NPV). In view of the measurement problem of the cost of equity, neither NPV nor residual income is measurable. NPV is used to measure value-added, and requires discount rates. Firm value, NPV, and residual income are output variables. This paper proves that discount rate is a subset of expected rate of return. False discount rates “output variables” change firm value and NPV into input variables. Input-Output logic provides rules to identify input/output variables.
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