Time value of money
Definition · Level 9 · Valuation
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The principle that a dollar today is worth more than a dollar later, because it can be invested meanwhile and future payments are uncertain — the basis of all discounting and compounding.
Example
At 5%, $100 today = $105 in a year; $105 in a year = $100 today.
Where Tradecraft teaches it
Level 9 · Valuation, in the lesson “Intrinsic value: discounting and DCF”: Time value of money, DCF steps, terminal value, WACC, CAPM and sensitivity.
Related terms
- CAPMCapital asset pricing model: cost of equity = risk-free rate + beta × equity risk premium, where beta measures the stock’s sensitivity to market…
- Cost of debtThe rate a company would pay on new borrowing — roughly the yield on its bonds.
- Cost of equityThe return shareholders require to own the stock given its risk — an opportunity cost, not a cash payment.
- DCFIntrinsic valuation: forecast free cash flows, add a terminal value, discount everything at the matching cost of capital (WACC for unlevered flows)…
- Discount rateThe annual rate used to convert future cash flows into present value — the return investors require for the risk taken (WACC for a firm’s FCF, cost…
- Equity risk premiumThe extra annual return investors demand for owning stocks rather than risk-free government bonds.