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1.
If a company's perpetuity value for discounted cash flow purposes is, say, $4 billion, the present value of that $4 billion will be _______.
Less than $4 billion. The present value calculation should result in a number that is less than $4 billion, since we have to discount those future cash flows back to the present to account for the time value of money.
2.
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.
3.
What is the basic idea behind discounted cash flow?
A stock's worth is equal to the present value of all its estimated future cash flows. Discounted cash flow is ultimately what analysts use to identify a stock's intrinsic value.
4.
As a rule, and all else being equal, the riskier a company is, the _______ its discount rate will likely be.
Higher. Also, the lower the value of its future cash flows will be, all else equal.
5.
A company's cost of capital is the return that investors get for their investments in the company.
