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Say you expect a company to make $100B dollars over the next 20 years. What is the value of that? One might say it is $100B because interest rates are 0. Not
by TekMol 6y ago
Say you expect a company to make $100B dollars over the next 20 years. What is the value of that?
One might say it is $100B because interest rates are 0.
Not discounting future earnings would make companies extremely valuable. Usually, high P/E ratios are reserved for growth companies. But without discounting, even a company that does not grow at all would be well worth a P/E ratio of 1000. It just has to keep going for 100 years.
What do you guys think?
- everling 6y agoFuture earnings should only be discounted solely with a risk-free rate if the future earnings themselves are certain, i.e. risk-free. But they aren’t, so you have to account for that with a steeper discount. Your $100bn earnings are shrouded in uncertainty, so as an investor you demand compensation for taking that risk, hoping that the earnings will materialize.