When a valuation of a company is made, it is done by modelling future cash flows and discounting them to the present-day value in a discounted cash flow model. Fundamentally, this relies on the estimates of future cash flows to accurately determine what the current valuation for a company should be. All sorts of assumptions need to be made to accurately determine this competition in the marketplace — future demand for the product or service, and technological innovations all among them.
Another factor that has to be accounted for is monetary policy, which is something we’ve seen largely increase the value of equities as a result of looser monetary policy, cheap debt and pulling back future cash flows. So even though a discounted cash flow model is severely flawed, it can give us a starting point through which to value a company because there are fiat cash flows associated with it.
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