Understanding the Discount
Rate
Future earnings are discounted to get their present values because the further in the future Earnings are projected to occur, the least valuable they are in the present due to the time value of money and the general risk that they won't occur. The rate that future earnings are discounted at is the current 10-year US Treasury bond yield plus an earnings risk premium of 7%. The 10-year US Treasury bond yield reflects the rate the market is currently offering for the time value of money for a virtually risk investment and the 7% earnings risk premium is the general risk that earnings won't be realized due to macroeconomic factors that are unpredictable such as wars, natural disasters, and abnormal governmental mismanagement.
Future earnings are discounted to get their present values because the further in the future Earnings are projected to occur, the least valuable they are in the present due to the time value of money and the general risk that they won't occur. The rate that future earnings are discounted at is the current 10-year US Treasury bond yield plus an earnings risk premium of 7%. The 10-year US Treasury bond yield reflects the rate the market is currently offering for the time value of money for a virtually risk investment and the 7% earnings risk premium is the general risk that earnings won't be realized due to macroeconomic factors that are unpredictable such as wars, natural disasters, and abnormal governmental mismanagement.