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Abstract
In theory, the intrinsic value of a stock is determined by discounting the projected cash flow by a term structure of time-varying required returns. In practice, investors typically use a single discount rate, often a Treasury rate plus a risk premium. A single discount rate is a noisy proxy for the full term structure and can cause large valuation errors. If a single discount rate is used, the yield to perpetuity recommended by John Burr Williams is likely to be a better approximation to a complete term structure than are short-term rates.
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