Integrating Discounted Cash Flow and CAPM in Equity Valuation: The Potential Payback Period as a Time-Based Measure of Earning Power

Rainsy Sam

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the analytical significance of integrating the Discounted Cash Flow (DCF) model, formalized by Irving Fisher [1], and the Capital Asset Pricing Model (CAPM), developed by William F. Sharpe [2], John Lintner [3], and Jan Mossin [4], within the framework of the Potential Payback Period (PPP). While DCF provides the structural foundation for valuation and CAPM determines the appropriate discount rate incorporating risk, their integration within the PPP yields a unified, time-based measure of earning power, understood as the capacity of a firm to generate future earnings sufficient to recover, as a first step, the initial investment in present value terms. This notion of earning power is central to equity valuation because the intrinsic value of a stock ultimately depends on the magnitude, growth, and risk-adjusted sustainability of its future earnings [5][6][7]. By expressing this earning power as a time horizon of recovery, the PPP provides a direct and operational interpretation of value. This synthesis enhances interpretability, improves cross-asset comparability, and addresses key limitations of traditional valuation metrics such as the Price-Earnings ratio [7][8]. The PPP is thus shown to represent a meaningful advancement in financial analysis by operationalizing the joint effects of value, risk, and time.

Keywords: Potential Payback Period (PPP); Discounted Cash Flow (DCF); Capital Asset Pricing Model (CAPM); valuation; earning power; time horizon; internal rate of return (search for similar items in EconPapers)
JEL-codes: D81 G11 G12 (search for similar items in EconPapers)
Date: 2026-04-18
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