Discounted Cash Flow (DCF) values a company by projecting future free cash flows and discounting them to present value. The terminal value accounts for cash flows beyond the projection period. Small discount rate changes hugely affect value.
Answer: A dollar today is worth more than a dollar in the future (time value of money). The time value of money means $1 now is worth more than $1 later — DCF converts future cash to present-day value.
Answer: The required rate of return (WACC) reflecting opportunity cost and risk. The discount rate (usually WACC) reflects the minimum acceptable return given the risk of the investment.
Answer: Increase the implied valuation. Higher assumed long-run growth → higher terminal value → higher DCF valuation (and higher sensitivity to this assumption).
Answer: Stock price to net assets per share (book value). P/B = Market Price ÷ Book Value per share. Useful for banks and asset-heavy companies.
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