Discounted Cash Flows

What is Discounted Cash Flows?

Discounted Cash Flows is a valuation technique used by investors and financial experts for the purpose of interpreting the performance of an underlying assets or investment. It uses a discount rate that is most probably the cost of capital raised.

How it works

Each type of asset produces returns in shape of cash flows. For example the cash flows associated with a bond are interest payments and principal repayment. Similarly a share has cash flows in terms of dividends. These cash flows are discounted at an appropriate discount rate. For bonds it is normally the YTM and for shares it is normally the cost of equity.

Valuation of shares

The shares promise to pay dividends that are cash flows. Suppose a company has a policy to pay $5.80 as dividend per year in perpetuity and the discount rate is 15%. The value of the share will be as follows

Value of share = Dividend / Discount rate = $2.80 / 0.15 = $18.67

See how discounted cash flows are used for valuation of company

Still want to learn more about Discounted Cash Flows

Checkout other online study materials on SolutionInn

Related solved question answer on Discounted Cash Flows

READ THE FOLLOWING ARTICLE AND THEN WRITE A SUMMARY AND DESCRIBE WHICH VALUATION METHOD DISCUSSED...... discounted cash... all of the valuations into one.READ THE FOLLOWING ARTICLE AND THEN WRITE A SUMMARY AND DESCRIBE WHICH VALUATION METHOD...

What is the present value of the following set of cash flows, discounted at 9.2% per year? Year CF 1 $12 b. What is the present value of the following set of cash flows, discounted at 9.2% per year? Year 1 $48 2 $39 CF c....

Cartma plc's superb strategic planning group have identified five projects they judge to be...... cash flows... is the maximum NPV available if projects are selected on the basis of NPV alone? Now calculate profitability indices (or...

Overall Recommendation 5. Based on both the financial and non-financial factors together, which...... discounted cash flows... (114,400) (114,400) (114400) (114,400) (650,000) 147,111 122,290 101,772 84,808 97,227 29,843 25,951 22,566...

QUESTION 1Muffins co. is considering to modernize its production facilities and it has two...... cash flows... Y has a 14.6% expected return a beta coefficient of 1.4, and a 25% standard deviation. The risk-free rate is 6%, and the...

7. 8. O Payback period was the earliest -Select- expected rate, the project will break even. The...... Cash flows... What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. years 270 720...

In early 2011, Bowen Company acquired a new business unit in a merger. Allocation of the...... cash flows... The acquired business unit has a fair value of $ 17,000,000, a carrying amount of $ 18,500,000, and the fair value of its...

The payback method helps firms establish and identify a maximum acceptable payback period that...... discounted cash... recovered.Year 0Year 1Year 2Year 3Cash flow$-4,000,000$1,600,000$3,400,000$1,400,000Discounted cash flowCumulative...

Please find the attached case study of Saurabh Enterprises who is trying to make a capital...... discounted cash... of the project with the NPV, IRR, MIRR, simple payback period, and discounted payback period methods. Is the project...

CoursHeroTranscribedText: A 5-year loan in the amount of $48,000 is to be repaid in equal annual...... the cash... in the amount of $48,000 is to be repaid in equal annual payments. What is the remaining principal balance after the third payment if...

See More Questions

Join SolutionInn Study Help for

3 Million+ Textbook Solutions

Learn the step-by-step answers to your textbook problems, just enter our Solution Library containing more than 3 Million+ textbooks solutions and help guides from over 1300 courses.

24/7 Online Tutors

Tune up your concepts by asking our tutors any time around the clock and get prompt responses.

Start Membership

Post a Question

Answers from our tutors for your tough homework questions