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A Critical Idea in Valuing Stocks Is Being Made Obsolete by Low Rates

'DCF' and low interest rates don't mix, says Sanford Bernstein.
Construction At A KB Homes Development Ahead Of Housing Starts Figures
Photographer: David Paul Morris/Bloomberg

Years of ultra-low borrowing costs means that many governments — and even corporates — are no longer paying much for time, throwing into jeopardy what Sanford C. Bernstein considers to be the "heart" of financial analysis.

Discounted cash flow modeling, or DCF, is a method of arriving at a fundamentally-driven net present value for companies based on the estimated evolution of their cash flows over the life of their operations. Future earnings potential is "discounted" in light of the presumption that receiving a dollar today is usually more valuable than a dollar tomorrow; in addition, because of the cost and risk associated with financing the creation of those cash flows.