Dependence of Investing Strategies on Expected Discounted Rate

Abstract

The Discounted Cash Flow model is a cornerstone in the fields of corporate finance and investment valuation, serving as a crucial decision-making tool for stock valuation. Driven by the motivation of searching for the dependence of different investing strategies on expected discounted rates, the article compares the valuations of two types of hypothetical net free cash flows under the same fluctuation of discounted rates, representing the stable and aggressive growth of companies. Modeling studies are then supported by regressing different representative indexes on the yield-to-maturity of China's 10-year treasury bond. A larger dependence on treasury yield is shown in valuable stocks than in grow-up stocks. The work uses a hypothetical model to explain this phenomenon from the perspective of investors. Valuable stocks investments give greater weight to assessments of the macro environment because of lower sensitivity and predictable patterns, whereas grow-up stocks investors base their careful assessment of the volatile valuation of start-ups less on the standard rate, even though it implies a risk-free rate.