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1.
For the purpose of discounting a company's future cash flows, the term "cost of capital" means _______.
The rate used to discount the company's future cash flows backward to the present. The math will explain how it figures into the cash flows.
2.
When it comes to finding a stock's intrinsic value, what is the problem with simply counting up all the future dividend payments a company is expected to make and expressing them in today's dollars?
Some companies do not pay dividends. That is why cash flow is used.
3.
Suppose Company A has a long history of profitability, and its outlook is stable, and Company B has yet to make a profit in its short history, and its outlook is much more uncertain. Company A's cost of equity should be _______.
Less than that of Company B. This is because estimated cash flow in the future from Company A is much more certain than it is from Company B. Risk and assumed cost of equity (the return equity investors require) should be concurrent. Lower risk should mean a lower cost of equity assumption, and vice versa.
4.
When calculating discounted cash flow, why are we discounting it at all?
Because the further out a cash flow is, the less it is worth in today's dollars. The math will bear this out.
5.
The concept of perpetuity value involves estimating a company's future cash flows for a certain period and then estimating the value of all cash flows after that in what form?
One lump sum. The perpetuity value will be expressed in one lump sum, then discounted for its present value.
