Discounted Future Cash Flow
What a rational investor is willing to pay today in order to receive a cash flow on a future date. DCF projections generally consist of two parts: the time value of money and the risk premium.
Personally, I do evaluate risk when purchasing a stock, but I never do so by assigning a risk premium.
When evaluating an expected long – term commitment, which a stock purchase usually is, I believe an appropriate discount rate is neither less than eight percent nor more than twelve percent. When evaluating a shorter term commitment, I believe an appropriate discount rate is no less than four percent and no greater than the yield on the applicable US Treasury debt instrument.
The four percent figure is simply an absolute floor on what money would be lent out at absent government intervention. There are estimates made by economists of what the natural rate of interest is. However, I simply use the four percent figure based on what little is known about lending in pre – modern times, and assume the rate has been pretty constant throughout human history (this is actually a groundless assumption; logic suggests the rate is lower today than it was a few thousand years ago, but I won’t bore you with the explanation – and it hardly matters; four percent is still a reasonable estimate).