Re:What if Facebook isn’t so special after all?
by damoncali on Tuesday April 24, 2012 @04:14PM
(#3886119)
Because the value of the company is tied very strongly to its growth rate.
The present value of a perpetual annuity (to keep things simple) is C/r where C is the recurring payment you get, and r is the discount rate (or risk inherent in actually getting C). Think of r as an interest rate- you demand a higher one if you invest in a risky company.
Throw in growth and it becomes C/(r-g) where g is the growth rate. As you can see, g is very, very important.
Valuing a company is much more complex, but the same basic truth holds - growth is a huge contributor to value.
The present value of a perpetual annuity (to keep things simple) is C/r where C is the recurring payment you get, and r is the discount rate (or risk inherent in actually getting C). Think of r as an interest rate- you demand a higher one if you invest in a risky company.
Throw in growth and it becomes C/(r-g) where g is the growth rate. As you can see, g is very, very important. Valuing a company is much more complex, but the same basic truth holds - growth is a huge contributor to value.