Session 3: Intrinsic and DCF Valuation - Laying the Groundwork

In this session, we started class by completing the discussion of pricing and real options, at least in a big picture sense. We then began our intrinsic value discussion by talking about the weapons of mass distraction. If you want to read the blog post I have on the topic, try this link:
We then spent some time setting up the process of discounted cash flow valuation, arguing for consistency in discounting. If the cash flows that you are discounting are cash flows to equity, estimated either as dividends or as potential dividends, the discount rate should be the cost of equity. If the cash flows that you are discounting are pre-debt cash flows, i.e,, cash flows to the firm, the discount rate has to be the cost of capital. Done right, the value of equity should be equivalent with both approaches. Try the weekly challenge that I will send out next session, if you do not believe me.

[rubenlopezmaya]

Great Session! Thank you so much for sharing this knowledge for free.

[aryanpatil]

Hi professor. I have a question. Why do you consider beta as a measure for risk? beta is just a volatility ratio relative to the general market. I personally prefer to use debt to equity ratio instead of beta as a measure of risk. In the case of beta, why should the opinions of other investors, which drives the stock price in the short term, considered as a measure of risk when the fundamentals of the business have not changed that much. Also what is your on Warren Buffet's takes on beta? Thanks a lot in advance!

[Jintianchiyu]

I don’t understand what is the smartest way to use the cash? Return to its owners? Who are the “owners”?

[techindiacg]

Hello sir, I request you to make a video on ADANI group as a case study. How to value a company.