Valuation when Cash Flow Forecasts are Biased
AbstractThis paper focuses adaptations to the discount cash flow (DCF) method when valuing forecasted cash flows that are biased measures of expected cash flows. I imagine a simple setting where the expected cash flows equal the forecasted cash flows plus an omitted downside. When the omitted downside is temporary, the adjustment is to deflate the forecasts and to set the discount rate equal to the cost of capital. However, when the downside is permanent, the adjustment is to deflate the cash flows and to increase the discount rate so that it includes the cost of capital plus the probability of a downside.
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Bibliographic InfoPaper provided by Harvard Business School in its series Harvard Business School Working Papers with number 11-036.
Length: 29 pages
Date of creation: Oct 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-10-16 (Accounting & Auditing)
- NEP-ALL-2010-10-16 (All new papers)
- NEP-FOR-2010-10-16 (Forecasting)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Marc Zenner & Tomer Berkovitz & John H.S. Clark, 2009. "Creating Value Through Best-In-Class Capital Allocation-super-1," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(4), pages 89-96.
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