- The goal of the DDM is to quickly and easily utilize available resources of an asset to understand what the intrinsic value of that asset is based on certain market and company expectations.
- If the required return component of the equation rises without expectations of higher company growth, then the difference between the two variables in the denominator widens, reducing the company’s intrinsic value.
- So, a large portion of the value of these growth-focused companies comes from a distant future, which carries a lot more unknown than a company that is currently generating positive cash flow.
For further details see:
Sector Views: How Higher Yields Impact Equity Valuations