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Politics : High Tolerance Plasticity
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To: whitepine who wrote (22921)3/14/2005 3:27:39 PM
From: bull_derrick  Read Replies (1) of 23153
 
wp, in terms of a pure financial model, what they taught us in Finance class in business school was that the stock price should be theoretically equal to the net present value of all future cash flows.

This simple statement has some basic flaws in that it would predict that a company with negative cash flows would be worth zero yet plenty of startups consume cash at least initially so the market has to put some guessing into what future cash flows will be a few years out. Also net present value changes greatly depending on what inflation rate deflator one puts on things but this does answer the question why when rates go up (and eventually bond yields become attractive), that stock prices begin to wither beyond a certain point.
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