Question
A generalized model for the value of any asset is the present value of the expected cash flows: Value equals the summation from t equals
A generalized model for the value of any asset is the present value of the expected cash flows:
Value equals the summation from t equals 1 to N of CF sub t over open parenthesis 1 plus k close parenthesis to the t power
Where:
N ; equals ; life of the asset ; CF sub t ; equals ; cash flow in Period t ; k ; equals ; appropriate discount rate ;
Both stock and bond valuation models use a discounted cash flow approach, which includes the estimation of three factors (N, CFt, k).
Explain why each of these three factors is generally more difficult to estimate for common stocks than for traditional corporate bonds.
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