For an unlevered DCF, which discount rate is typically used?

In the context of an unlevered Discounted Cash Flow (DCF) analysis, the appropriate discount rate to use is the Weighted Average Cost of Capital (WACC). This discount rate reflects the average rate of return that a company is expected to pay its security holders to finance its assets, independent of any debt.

Since an unlevered DCF is focused on the value of a business without the effects of capital structure (debt), it calculates cash flows as if the company has no debt. As a result, using WACC is suitable because it accounts for the cost of equity as well as the proportionate cost of debt. It reflects the overall risk and return expectations associated with the company's equity and debt in a balanced manner.

Other rates like the cost of equity or the risk-free rate do not adequately represent the total expected returns for all capital providers in a company that is operating without leverage. The cost of equity focuses solely on equity financing, while the risk-free rate does not incorporate risks associated with the business, and the market return rate is even broader as it represents overall market performance and does not distill down to specific company risks. Hence, WACC is appropriate for discounting the cash flows in a valuation reflecting an unlevered perspective