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

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  • Sam, Rainsy

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.

Suggested Citation

  • Sam, Rainsy, 2026. "Integrating Discounted Cash Flow and CAPM in Equity Valuation: The Potential Payback Period as a Time-Based Measure of Earning Power," MPRA Paper 128768, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:128768
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    References listed on IDEAS

    as
    1. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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