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QuestionsCategory: Valuation QuadrantDiscounted cash flow (discount factor)
Lim Marko asked 5 years ago

Hi guys 
A very good evening to everyone!!! 
May I know what is the purpose for choosing a discount rate? (For example if you want to valuate a SG stock you will use CPF SA rate which is 4) 
Is it because of you need to use the discount rate to pluck into the discount factor formula to find the discount factor and with the discount factor, you are able to bring the projected company cash flow from future value to present value ??
Hope to hear from you soon 
your sincerely 
Marko Lim

Jieren Zheng replied 5 years ago

Just sharing my thoughts, I think normally, the country’s 10 year bond yields are used.
It is a method to see what the company is worth today based on what it could yield in the future but using the concept of the value of time (your discount rates assume how is it vs you putting money in a 10 year bond).

Lim Marko replied 5 years ago

Thanks Jieren!!!

Lim Marko replied 5 years ago

Hi Jieren

Can you explain a bit further for this statement (your discount rate assume how is it vs you putting money in a 10 year bond)

Thank you

Jieren Zheng replied 5 years ago

Kinda like if you don’t invest in the company, and you put it in a 10 year bond, what’s the difference in returns?

1 Answers
Best Answer
Victor Chng answered 5 years ago

Hi Marko,
We based it on the opportunity cost. Since putting our money in SA will get a risk free 4% hence if we want to invest we need to beat the 4% if not we just put our money in the SA.

Lim Marko replied 5 years ago

Hi Victor,

So how do you know that you manage to beat the risk free rate ?

Is it by finding the sum of discounted cash flow per share then You compare it to the current share price of the company.

If it is below the company share price means you will earn more than 4 %

If it is above the company share price mean you will learn less than 4%

Am I correct thanks for the enlightenment victor!!!

Victor Chng replied 5 years ago

Hi Marko, since you already discount the 4% in the intrinsic value and if you buy it at discount with margin of safety. More or less the 4% is already being account and if everything work out you should be able to beat it.