Stock valuation discounts future dividends because present money earns interest.
Evidence
Expected future dividend payments cannot, however, simply be added up in order to reach a value for a corporation’s stock. In part, that is because of the effect of inflation, but even without inflation the value of a dollar received in a year’s time is less than that of a dollar received now, because the latter can be invested and earn interest. To work out the value of a stock, expected future dividends have therefore to be “discounted”: their present value has to be calculated using an appropriate interest rate.” Hence the name “dividend discount model.” — Donald MacKenzie, An Engine, Not a Camera, 205
Categorization
- DEFINE: Explains the core mechanics of present-value discounting that grounds the dividend discount model.
- XREF: connects to: Asset value derives from future earnings rather than intrinsic commodity value — Kean Birch, Rethinking Value in the Bio-economy:…, 73; Discounted cash flow valuation treats the future ambivalently, valuing yet discounting it. — Ève Chiapello, Financialisation of Valuation, 30; The dividend discount model already anticipated the Miller-Modigliani irrelevance critique. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 204 (+4 more)
Broader Connections
- Bank lending transfers future value to the present to earn interest
#corroborates(0.85) — Yanis Varoufakis, Technofeudalism, 1028 - Capital budgeting decisions hinge on the discount rate applied to future cash flows.
#expands(0.80) — Donald MacKenzie, An Engine, Not a Camera, 561 - Discounted cash flow valuation spread from bonds to all goods via neoclassical utility theory.
#expands(0.78) — Ève Chiapello, Financialisation of Valuation, 30 - Derivatives function by binding future prices to the present and blending forms of capital.
#corroborates(0.72) — Andrew deWaard, Derivative Media, 170