Ask HN: How do you discount future earnings in times of zero interest rates?

1 pointTekMol3 comments

Say you expect a company to make $100B dollars over the next 20 years. What is the value of that?

One might say it is $100B because interest rates are 0.

Not discounting future earnings would make companies extremely valuable. Usually, high P/E ratios are reserved for growth companies. But without discounting, even a company that does not grow at all would be well worth a P/E ratio of 1000. It just has to keep going for 100 years.

What do you guys think?

Future earnings should only be discounted solely with a risk-free rate if the future earnings themselves are certain, i.e. risk-free. But they aren’t, so you have to account for that with a steeper discount. Your $100bn earnings are shrouded in uncertainty, so as an investor you demand compensation for taking that risk, hoping that the earnings will materialize.

Use a risk-adjusted discount rate/curve. The published rate is considered risk free. And note that it’s not zero all the way out to longer maturities. To do this seriously look at the curve.

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