Stock Valuation

Chapter: 10 Stock Valuation

Section: 1 Valuation

The value of a firm is based on its capacity to generate cash flows and the uncertainty associated with these cash flows. One of the foremost underlying principles of modern finance is that “the value of any asset is equal to the present value of all expected future cash flows discounted at the required rate of return”. In this chapter, we explore the fundamentals of this discounted cash flow (DCF) approach, starting with an asset with guaranteed cash flows and then moving on to look at assets where there is uncertainty about the future. In the process, we cover the groundwork for how to value a firm and estimate the inputs that go into the valuation.

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