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This approach encourages dialogue focused on the business fundamentals the team, the market opportunity, the product, the financial projections rather than anchoring the conversation to arbitrary figures potentially derived from selectively chosen, and often inappropriate, market comparisons.
The DDM is more grounded because it’s based on the company’s actual distributions and potential future value. And it values the company today based on the present value of its dividends and that potential future value (either the stock price or the Equity Value via the TerminalValue calculation).
But here, we use what interest we could get from an alternative investment in the market, called the Market Rate. Discount Factor (using Market Rate: r=10%). But first, a quick aside, which you can feel free to skip if you want to jump ahead: Why Do We Use the Market Rate to Calculate the Discount Factor? You get: Year.
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