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Strategies & Market Trends : Free Cash Flow as Value Criterion -- Ignore unavailable to you. Want to Upgrade?

To: Pirah Naman who wrote (140)	11/4/1997 4:26:00 PM
From: Reginald Middleton	Read Replies (1) \| Respond to of 253

<1) The discounted future earnings method... requires ...the investor's desired rate of return.><2) Each year's income and the residual value are then discounted...by the desired rate of return.> You are not understanding what you are reading. The prudent man rule guides the investor to require a return that will be equivalent to investing in an alternative riskless asset. Therefore the investment that you are trying to value has to be compared to that of a riskless asset. You must know what the investor's required return means in order to understand what is trying to be communicated. In addition, part I of the valuation primer has outlined the many weaknesses in the discounted earnings methodology. <3) Any significant adjustment in the discount rate to adjust for risk will impact the discount process and distort the value estimate.> This statement assumes one is knowledgeable in attaining the appropriate discount rate to begin with. If one has not attained an appropriate discount rate, this statement is meaningless.