
The company is also worth less when it is riskier or when expectations for it are higher, i.e., when the Discount Rate is higher. The “Discount Rate” represents risk and potential returns – a higher rate means more risk, but also higher potential returns.Ī company is worth more when its cash flows and/or cash flow growth rate are higher, and it’s worth less when those are lower. The big idea is that you can use the following formula to value any asset or company that generates cash flow (whether now or “eventually”):

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