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Stocks 403: Introduction to Discounted Cash Flow

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1.
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?
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Some companies do not pay dividends. That is why cash flow is used.
2.
If a company's perpetuity value for discounted cash flow purposes is, say, $4 billion, the present value of that $4 billion will be _______.
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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.
3.
A company's cost of capital is the return that investors get for their investments in the company.
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True. This includes interest and dividends.
4.
When calculating discounted cash flow, why are we discounting it at all?
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Because the further out a cash flow is, the less it is worth in today's dollars. The math will bear this out.
5.
Which cost is easier to calculate?
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The cost of debt. The cost of debt boils down to the interest rate a company pays to borrow money. But the cost of equity is debatable and uses more factors.