Myth 4.3: The D cannot change (over time) in a DCF
aswathdamodaran.substack.com
In my last post, I argued that academics and practitioners pay too much attention to discount rates in valuation and too little to cash flows. One reason for that attention may by the fear that you have only one shot at estimating the cost of equity or capital, when valuing a firm, and that once estimated, that number becomes the discount rate to use on cash flows in perpetuity. In this post, I will argue that this fear is misplaced and that the DCF approach not only allows for changing discount rates over time but requires it for most firms.
Myth 4.3: The D cannot change (over time) in a DCF
Myth 4.3: The D cannot change (over time) in…
Myth 4.3: The D cannot change (over time) in a DCF
In my last post, I argued that academics and practitioners pay too much attention to discount rates in valuation and too little to cash flows. One reason for that attention may by the fear that you have only one shot at estimating the cost of equity or capital, when valuing a firm, and that once estimated, that number becomes the discount rate to use on cash flows in perpetuity. In this post, I will argue that this fear is misplaced and that the DCF approach not only allows for changing discount rates over time but requires it for most firms.