I thought someone would say this. You don't need to use WACC,...

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johnmcgee

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08/11/14

02:30

Post #: 14256258
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Originally posted by Andy1000 ↑

Hi JohnMcgee,

You are correct about discounting cash flows into the future. Unfortunately you have got the DCF formula wrong.

The DCF is the cash flows or earnings x growth rate divided by the weighted average cost of capital (WACC)

With interest rates low (near zero in the US), the WACC comes down and when you have a lower number on the bottom of the equation you get higher present values.

This is of course not mentioning the huge flaws in using a simplistic formula where even slight changes in the inputs have a large affect on the present value. In other words there is potential for your valuation to be completely out of the ball park if your estimates of the growth rate and discount rate are off by even a small margin.

In considering 'Mr Market' you need to consider the returns on offer for fixed interest investments also. As madamswer correctly points out, the offerings in the fixed interest market are very slim at the moment. Yields are near zero and so all those large funds who are searching for yield start looking at equity investments as a proxy.

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I thought someone would say this. You don't need to use WACC, you can use any rate you want. My discount rate is the difference between CCA and any other ASX stock because I was trying to highlight the difference in value between CCA and the ASX. If you analysed both using WACC of zero and then compared them to each other you would do a lot more math but get the same result.

CCL Price at posting: $9.49 Sentiment: Buy Disclosure: Held
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