Some mathematically inclined researchers  have suggested that the true or intrinsic financial value of the common shares of a company can be determined using discounted cash flow (DCF) analysis. That is, the intrinsic financial value of a share is equal to the total value of all the dividends expected to be paid per common share into the indefinite future, discounted to the present value. (Present value is based on the fact that a dollar in your hands today is worth more than a dollar that will be paid to you 10 years from now, because of the effects of monetary inflation). From a mathematical perspective this approach is eminently rational.

 

It is always a tragedy when an elegent and rational concept meets an ugly fact. In this case, the fact is that DCF requires an  estimate of two uncertain variables: 

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• The annual dividend that will be paid per common share, each year into the indefinite future, and

• The annual discount rate (inflation rate) that should be applied to the dividend each year into the future.  

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The intrinsic value calculated using DCF analysis is extremely sensitive to the values of these two variables, so that the analysis yields a wide range of potential intrinsic values, even when the values used for the two variables fall within a reasonably narrow range. As a result, it is not possible determine, to a high degree of confidence, the intrinsic value of the shares using DCF analysis. How tragic ! ​

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1. Gray, G, Cusatis, P.J., Woolridge, J.R., 2004. The Streetsmart Guide to Valuing a Stock. The Savvey Investor's Key to Beating the Market. 2nd Ed. The McGraw-Hill Companies, Inc. New York, NY. ​