Discounted Cash Flow Formula
The value of most investments is generally equal to the present value of its future cash flows. So 1 method of estimating the value of an asset or a business is by calculating the discounted cash flow that the asset will earn. The price of a bond, for instance, = the cash flows of each interest payment + the principal repayment, discounted by the bond yield. In short, the present value of an asset is the value of its cash flows, discounted by the investor's required rate of return, calculated thus:
n  CF_{k} (1+r)^{k}  
PV  =  ∑  
k=1  

This is nothing more than calculating the present value of an annuity, where the cash flows are equal to the annuity payments.
Calculating a Business Value Using Discounted Cash Flow
An investor in a business receives cash flows as income earned while holding the interest and capital gains when the business interest is sold. For a shareholder of a corporation, income is received as dividends and capital gains is received when the shares are sold (if the investment was profitable). So the value of the investment can be calculated by discounting the cash flows of the dividend payments + the expected capital gain.
From the constantgrowth dividend discount model, we can infer the market capitalization rate, k, or the required rate of return, demanded by investors. Note that:
Capitalization Rate = Dividend Yield + Capital Gains Yield
If a stock is held for 1 year, and is bought and sold for its intrinsic value, then the following discounted cash flow formula calculates the market capitalization rate:
Capitalization Rate (k)  =  Dividend Yield  +  Capital Gains Yield 
D_{1} P_{0}  (P_{1} − P_{0}) P_{0}  
=  +  
D_{1} P_{0}  (P_{0}(1+g) − P_{0}) P_{0}  
=  +  
D_{1} P_{0}  
=  +  g  
k = Capitalization Rate D_{1} = Next Year's Dividend P_{0} = This Year's Stock Price P_{1} = Next Year's Stock Price g = Dividend Growth Rate 
Often, this is how rates are determined for public utilities by the agencies responsible for setting public rates. Public utilities are generally allowed to charge rates that cover their costs + a fair market return, with the fair market return being the market capitalization rate.
Example: Calculating the Market Capitalization Rate
If a stock, with an average risk, has a market price of $40, pays a $1 quarterly dividend, and is growing 6% annually, then the market capitalization rate based on this information would be:
Market Capitalization Rate = $1 × 4 / $40 + 0.06 = 0.16 = 16%
Hence, we can infer that the market is demanding a required rate of return of 16% to compensate for the risk of owning the stock.