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I'm not sure I would say expect, because it is possible that you discount the cash flow estimates at 10% (or another number) and find out the shares are already above that price. Ie. you're looking at a negative potential return. The higher the discount rate the lower your expected value and the more unlikely it is that the stock is undervalued.

If you're curious why this is so.... it is because of how discounting "works." Basically the first year of cash flow is worth (where x = first year cash flows):

Year 1 Value = X / discount rate

The second year is:

Year 2 Value = (X + growth assumption) / (1 + discount rate)^2

The third year is:

Year 3 Value = (2nd year X + growth assumption) / (1 + discount rate)^3

And so on, until you get to the calculation of the terminal year cash flows. You then add up the estimated value for each year and that is the estimated value today.

If you're curious about how it all works there are templates on From there you can input estimates and you'll see that as you raise the discount rate you get a lower estimated value. You'll also see how sensitive the model is to changes in different inputs.

Ultimately these exercises are only as good as the inputs and don't tell you exactly what a company is worth, because its much more likely that the company will ultimately perform a little bit better or worse than estimated, and the natural cycles of fear and greed in the market will push the price higher or lower too. It's still an extremely valuable exercise though, because it helps frame your thinking on growth estimates and risk, and how that ultimately effects value.


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