The Validity of Company Valuation Using Discounted Cash Flow Methods

Details The Validity of Company Valuation Using Discounted Cash Flow Methods The Validity of Company Valuation Using Discounted Cash Flow Methods

2010-03-25

arxiv.org/abs/1003.4881v2

Economy

Quantitative Finance

General Finance

Scientific paper

This paper closely examines theoretical and practical aspects of the widely used discounted cash flows (DCF) valuation method. It assesses its potentials as well as several weaknesses. A special emphasize is being put on the valuation of companies using the DCF method. The paper finds that the discounted cash flow method is a powerful tool to analyze even complex situations. However, the DCF method is subject to massive assumption bias and even slight changes in the underlying assumptions of an analysis can drastically alter the valuation results. A practical example of these implications is given using a scenario analysis.

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