Question

Example 1-1, based on a study of Intel Corporation that used a present value model (Cornell 2001) , examined what future revenue growth rates were consistent with Intel’s stock price of $61.50 just prior to its earnings announcement, and $43.31 only five days later. The example states, ""Using a conservatively low discount rate, Cornell estimated that Intel’s price before the announcement, $61.50, was consistent with a forecasted growth rate of 20% per year for the subsequent 10 years and 6 percent per year thereafter."" Discuss the implications of using a higher discount rate than Cornell did.

Answer 1

Answer:

Taking the present value of a single cash flow into consideration. If the discount rate is increased then, the cash flow would also be increased especially if a constant present value is maintained.

By comparison; let's make an assumption that Cornell used a higher discount rate, then that means he would need to project a higher level of assumed future cash flows that is higher than the present value to have been consistent with the given pre announced price of $61.50.

So, the implied growth rate consistent with a price of $61.50 would have been higher than the 20 percent growth rate estimated by Cornell.