The Analyst’s Course · Valuation & DCF
Intrinsic Value and the Time Value of Money
Why discounting exists
If you can earn 8% risklessly-ish in the market, then $1.08 next year and $1.00 today are the same asset. So $1.00 next year is worth $1.00 ÷ 1.08 = $0.926 today. Ten years out: $1.00 ÷ 1.08¹⁰ = $0.463. Twenty years: $0.215. The discount factor 1/(1+r)^t is the entire machinery of finance compressed into one expression — every DCF, bond price, and pension obligation is this formula applied repeatedly.
What r is and is not
The discount rate is the opportunity cost of capital — what investors could earn elsewhere at comparable risk. It is not the interest rate on the company's loans (that is the cost of debt, one component), not the inflation rate, and not the "cost of money" in any vague sense. For equities it is the WACC the next lesson builds: the blended required return of the company's shareholders and lenders, each weighted by their share of the capital.
Duration before we call it that
Note the shape of the math: the farther cash flows sit in the future, the more the discount factor punishes them — and the more sensitive their present value is to small changes in r. A company whose value is "all the growth after year ten" is a very long-duration asset. Hold that thought; it explains almost everything about 2022 and it returns in lesson 6 of the macro track.
PV = CFₜ ÷ (1 + r)ᵗ
Present value — At 8%, $1 in 10y = $0.46; in 20y = $0.22. Long-duration cash flows are exponentially rate-sensitive.
The 1999 example that priced a decade
At the 1999 peak, many internet companies were valued with implicit discount rates near zero — terminal "someday profits" treated as nearly as good as today's. When 2000 repriced risk, the same cash-flow stories discounted at proper equity rates fell 70–90%. Nothing about the businesses changed in twelve months; the denominator did. Every valuation is two numbers — cash flows and the rate — and markets periodically forget one of them.
What you'll practise
At an 8% discount rate, $1 received in 10 years is worth about…
3 graded checkpoints · certification exam at the end of the track
Sources
Damodaran (ERP data); Mauboussin, ATKM; McKinsey Valuation; IPO prospectuses (SEC S-1 filings)
Learn content is for education only — not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk. Examples are simplified and historical patterns never guarantee future results.