Hi - this is due to it being a growing perpetuity. The mathematical formula for a growing perpetuity is CF * 1/(r-g) as you have seen - so this is using Ke as r, and growth is still g.
Hi - this is due to it being a growing perpetuity. The mathematical formula for a growing perpetuity is CF * 1/(r-g) as you have seen - so this is using Ke as r, and growth is still g.
So the value of a company is the PV of future cash flows using a discount rate. What exactly does that discount rate mean? If the answer you get is say £1 million using a discount rate of 10% what does that mean?
Hi - the discount rate is the company's cost of capital (WACC). There is a separate Masterclass video on the WACC if you want to see what it's made up of!
@@AndrewMowerTuition I know how WACC is derived. I know the calculations. I know CAPM etc, but again some clarification on the CONCEPT of arriving at a company valuation based on using a discount rate. In other words say I need an investor and I say the company is worth £1million at 10% WACC. How does the investor interpret that? An investor who is unfamiliar with WACC and discount rates
This is because future earnings need to at least meet the company's cost of capital to generate value for investors. If the investor is unfamiliar with WACC and discount rates, it would be wise not to explain the value using WACC. They could also watch the RU-vid video on WACC to understand it 😀
