3 ms·
How do you calculate the present value of it's future cash flows? You 'discount' the future cash flows by the cost of capital.. which is tied to the interest r
by aeternum 6y ago
How do you calculate the present value of it's future cash flows? You 'discount' the future cash flows by the cost of capital.. which is tied to the interest rate.
So if interest rates go down, the present value of those future cash flows increases and share price increases.
- mcguire 6y agoI urge you to try the exercise and determine either the discount rate you need to use to get reasonable future valuations or the valuations you get with a reasonable discount rate.
- aeternum 6y agoSure, let's look at FB. AA corp bonds are around 2%, so let's use that for the discount rate and assume Fb maintains their 40% growth for 3 years then transitions to 10% for 7 years. Cash flows per share would be just under $50 during the growth period and just over $200 during the stability period. Basically 10 years to break even with the current share price. Not very far out of line with historical PE ratios.