What is the intuition behind this? How come when a company has negative cash flows, its enterprise value benefits from also a high cost of equity?
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You’re making the negative numbers smaller or closer to zero with a higher discount rate.
I understand the mathematics. What does this logically translate to?
-cleared-
i'm guessing here as i haven't hit the desk yet, but if cash flows are negative, then there's high growth expectations by nature of the industry. so they would be able to take on more debt and equity to be flush with cash to grow and they could grow their way out of negative cash flow, no?
You're (maybe) neglecting to think about the terminal value, which in a lot of DCFs accounts for the lion's share of the PV. So yeah, your high discount rate somewhat perversely make the negative cash flows for the 5 (or 7 or whatever) year projection period look better than would a lower discount rate, but you have to figure out how and when those turn positive and value those in perpetuity.
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