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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
House prices are falling in London but how does it compare to the rest of the UK?Advice The capital remains the most expensive part of the UK to buy a property, but it isn’t being as badly hit by the housing market slump. Where are London house prices heading?
-
Will a Santa Rally provide festive cheer for investors this year?
News Equities often get a seasonal boost during December - will there be a Santa Rally in 2023?
