Final answer:
The relationship between the discount rate and cap rate in the DCF method is that a higher discount rate usually means a higher cap rate, reflecting greater risk and required higher returns.
Step-by-step explanation:
According to the discounted cash flow (DCF) method approach to valuation, the relationship between the discount rate and the cap rate is intrinsically connected. The discount rate is used to convert future cash flows into their present value, factoring in the time value of money and the risk associated with the investment. The cap rate, which is the ratio of a property's net operating income to its property asset value, is similarly a reflection of the investor's expected rate of return.
When applying the DCF approach to assets such as stocks and bonds, it comes down to what an investor is willing to pay in the present for a stream of benefits to be received in the future. The discount rate incorporates both potential capital gains from the future sale of the asset and the dividends or interest that might be received. Therefore, a higher discount rate will generally correspond to a higher cap rate, as both reflect greater risk and thus require a higher return to compensate for that risk.