I'm trying to figure out the best discounting approach for Rackspace.

I attempted to use the model spreadsheet (the one that helps determine the correct approach to use), but I'm uncertain that I'm getting the right answer. It's stating to use the following methodology:

Model - Discounted CF
Level of Earnings - Current
Cashflows that should be discounted - Dividend (equity)
Length of period - 5 to 10 years
Growth pattern - Three stage

My only uncertainty is how the cashflows should be discounted, since the firm doesn't pay out any dividends. Can anyone provide insight? Thanks!

Question

I'm trying to figure out the best discounting approach for Rackspace.

I attempted to use the model spreadsheet (the one that helps determine the correct approach to use), but I'm uncertain that I'm getting the right answer.  It's stating to use the following methodology:

Model - Discounted CF
Level of Earnings - Current
Cashflows that should be discounted - Dividend (equity)
Length of period - 5 to 10 years
Growth pattern - Three stage

My only uncertainty is how the cashflows should be discounted, since the firm doesn't pay out any dividends.  Can anyone provide insight?  Thanks!

anonymous · Answer

You probably gave me an input that told me that told me that I could not estimate cash flows in the first place... Just because you pay no dividends today does not mean that you will not pay dividends in the future.