In corporate finance and valuation, we start off with the presumption that the riskfree rate is given and easy to obtain and focus the bulk of our attention on estimating the risk parameters of individuals firms and risk premiums. But is the riskfree rate that simple to obtain? Both academics and practitioners have long used government security rates as riskfree rates, though there have been differences on whether to use short term or long-term rates. In this paper, we not only provide a

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... rk for deciding whether to use short or long term rates in analysis but also a roadmap for what to do when there is no government bond rate available or when there is default risk in the government bond. We look at common errors that creep into valuations as a consequence of getting the riskfree rate wrong and suggest a way in which we can preserve consistency in both valuation and capital budgeting. different REPs: 8% and 5%. Copeland and Weston (1979 and 1988) used a REP = 10%, Weston and Copeland (1992) used a REP of 5%, and Weston, Mitchel and Mulherin (2004) used REP = EEP = 7%. Van Horne (1983) used a REP = EEP = 6%. In 1992, he used a REP = 5% because: "the 'before hand' or ex ante market risk premium has ranged from 3 to 7%." 5 Damodaran: What is the riskfree rate? A Search for the Basic Building Block Published by Journal of New Finance -UFM Madrid, 2020 According to Penman (2001), "the market risk premium is a big guess... No one knows what the market risk premium is." In 2003, he admitted that "we really do not have a sound method to estimate the cost of capital... Estimates [of the equity premium] range, in texts and academic research, from 3.0% to 9.2%," and he used 6%. Bodie and Merton (2000) and Bodie et al. (2009) used 8% for USA. Stowe et al. (2002, Chartered Financial Analysts Program) use a REP = Geometric HEP using T-Bonds during 1926-2000, according to Ibbotson = 5.7% 5 . Bruner (2004) used a REP of 6% because "from 1926 to 2000, the risk premium for common stocks has averaged about 6% when measured geometrically." Arzac (2005) used a REP of 5.08%, the EEP calculated using a Gordon equation. Titman and Martin (2007) mention that "Historical data suggest that the equity risk premium for the market portfolio has averaged 6% to 8% a year over the past 75 years. However... for the examples of this book we will use a REP of 5% which is commonly used in practice." Siegel (2002) concluded that "the future equity premium is likely to be in the range of 2 to 3%, about one-half the level that has prevailed over the past 20 years." 6 Siegel (2007) affirms that "the abnormally high equity premium since 1926 is certainly not sustainable." According to Shapiro (2005, pp 148) "an expected equity risk premium of 4 to 6% appears reasonable. In contrast, the historical equity risk premium of 7% appears to be too high for current conditions." However, he uses different REPs in his examples: 5%, 7.5% and 8%. The REPs used to calculate the cost of equity in the teaching notes published by the Harvard Business School have decreased over time. Until 1989 most teaching notes used REPs between 8 and 9% 7 . In 1989, the teaching note for the case Simmons Japan Limited admitted that the equity premium was in the 6-9% range and the teaching note for the 2000 case Airbus 6