Discount factor
Principles of Finance glossary · Valuation of Bonds & Stocks
Definition
The present value of $1 to be received at a future date.
Discount factor in plain English
Money in the future is worth less to you than money today, because a dollar today can be invested and grow, and because waiting carries risk. A discount factor is the exact shrink-ratio that answers 'how much is one future dollar worth right now?' — for example, a factor of 0.90 means $1 arriving in a year is worth $0.90 today. You multiply any future amount by the discount factor to pull it back to today's value, and the further away or riskier the payment, the smaller the factor. It's the mathematical price tag on patience.
Practice Discount factor
In the Gordon model, what is the relationship between the stock price and the required return (r)?
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