Re:U.S. inflation rate rises to 13-year high of 5.4%
by jliptzin on Wednesday October 13, 2021 @11:34AM
(#28853491)
Look at the formula for discounted cash flow. It's a widely used valuation model and applies to lots of companies, especially those in the growth phase where current market cap is largely dependent on expected cash flow far into the future.
Notice the denominator in the series - (1+r)^n where r = interest rates and n = number of years out. The more r rises, the more terms at the end of the series drop out because they're so close to zero. So that effectively means a company that's getting its value from cash flow 10+ years from now loses a lot of its value if interest rates are rising.
https://en.wikipedia.org/wiki/Discounted_cash_flow
Notice the denominator in the series - (1+r)^n where r = interest rates and n = number of years out. The more r rises, the more terms at the end of the series drop out because they're so close to zero. So that effectively means a company that's getting its value from cash flow 10+ years from now loses a lot of its value if interest rates are rising.