“Put in non-mathematical terms, the equation posits
that the value of an asset is the value of the expected cash flows over its
lifetime, adjusted for risk and the time value of money. If that sounds
familiar, it should, because it is the starting point for every Finance 101
class, a rite of passage that in conjunction with buying a financial calculator
sets you on the pathway to being a Financial Yoda!
That is the only theory that you need for valuation!
The rest of the class is about the practice of valuation: defining and
estimating expected cash flows for different types of assets and businesses at
different stages in the life cycle and estimating and adjusting the discount
rate for risk and time value. Note that there is nothing in this fundamental
equation that has not been known to investors and business people through the
ages, i.e., the value of a business has always been a function of its cash flows,
growth potential and risk and that you certainly don’t need to be
mathematically inclined to be able to do valuation.”
