The Validity of Company Valuation Using Discounted Cash Flow Methods
AbstractThis 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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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1003.4881.
Date of creation: Mar 2010
Date of revision: Apr 2010
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-28 (All new papers)
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- Beranek, William & Howe, Keith M, 1990. "The Regulated Firm and the DCF Model: Some Lessons from Financial Theory," Journal of Regulatory Economics, Springer, vol. 2(2), pages 191-200, June.
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