Discounting

One way to value a share is to add up the cash flows you expect to receive from it in the future and then ‘discount’ them.

Discounting is expressing cash received in the future in today’s money because inflation (for which the compensation as an investor is an interest rate on cash) erodes the value of money over time.

So, for example, £100 received now and invested at an annual interest rate of, say, 5% would be worth £105 in one year, £110.25 in two years (100 x 1.05 x 1.05) and £115.76 in three years.

Similarly, the discounted value (today’s equivalent) of £115.76 due in three years is £100. Or, given the choice between £100 now and £115.76 in three years, assuming annual interest rates of 5%, you should be indifferent as the two are worth about the same on a like-for-like basis.

• See Tim Bennett’s video tutorial: Five ways companies can cook cash flow.

66% off newsstand price

12 issues (and much more) for just £12

That’s right. We’ll give you 12 issues of MoneyWeek magazine, complete access to our exclusive web articles, our latest wealth building reports and videos as well as our subscriber-only email… for just £12.

That’s just £1 per week for Britain’s best-selling financial magazine.

Click here to take advantage of our offer

Britain is leaving the European Union. Donald Trump is reducing America’s role in global markets. Both will have profound consequences for you as an investor.

MoneyWeek analyses the critical issues facing British investors on a weekly basis. And, unlike other publications, we provide you with the solutions to help you turn a situation to your financial advantage.

Take up our offer today, and we’ll send you three of our most important investment reports:

All three of these reports are yours when you take up our 12 issues for £12 offer today.

MoneyWeek has been advising private British investors on what to do with their money since 2000. Our calls over that period have enabled our readers to both make and save a great deal of money – hence our position as the UK’s most-trusted investment publication.

Click here to subscribe for just £12