If you have taken a class on valuation, think back to what you spent most of your time doing and I will wager you spent it talking about discount rates. If there was any attention paid to cash flows and growth, it was either cursory or mechanical, and perhaps as a set up to returning to the discount rate discussion. I blame both practitioners and academia for this focus. The practitioner obsession with discount rates can be seen both in the time spent talking about discount rates at conferences and on estimating it in valuation. Reviewing the academic literature over the last few decades, the preponderance of it has been focused on developing models to estimate expected returns on risky investments (discount rates). As a result, classical portfolio theory and discounted cash flow valuation have become so entangled that, as I noted in my last post, there are those who on losing faith with portfolio theory have also felt the need to abandon DCF valuation as well.
Myth 4.2: It's all about D in the DCF
Myth 4.2: It's all about D in the DCF
Myth 4.2: It's all about D in the DCF
If you have taken a class on valuation, think back to what you spent most of your time doing and I will wager you spent it talking about discount rates. If there was any attention paid to cash flows and growth, it was either cursory or mechanical, and perhaps as a set up to returning to the discount rate discussion. I blame both practitioners and academia for this focus. The practitioner obsession with discount rates can be seen both in the time spent talking about discount rates at conferences and on estimating it in valuation. Reviewing the academic literature over the last few decades, the preponderance of it has been focused on developing models to estimate expected returns on risky investments (discount rates). As a result, classical portfolio theory and discounted cash flow valuation have become so entangled that, as I noted in my last post, there are those who on losing faith with portfolio theory have also felt the need to abandon DCF valuation as well.