RT Journal Article
SR Electronic
T1 Stocks Should Be Valued with a Term Structure of Required Returns
JF The Journal of Investing
FD Institutional Investor Journals
SP 61
OP 68
DO 10.3905/joi.2017.26.2.061
VO 26
IS 2
A1 Gary Smith
A1 Albert Xu
YR 2017
UL https://pm-research.com/content/26/2/61.abstract
AB In theory, the intrinsic value of a stock is determined by discounting the projected cash flow by a term structure of time-varying required returns. In practice, investors typically use a single discount rate, often a Treasury rate plus a risk premium. A single discount rate is a noisy proxy for the full term structure and can cause large valuation errors. If a single discount rate is used, the yield to perpetuity recommended by John Burr Williams is likely to be a better approximation to a complete term structure than are short-term rates.TOPICS: Fundamental equity analysis, portfolio theory