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Using Discounted Cash Flow Analysis In An International Setting: A Survey Of Issues In Modeling The Cost Of Capital

  • Tom Keck
  • Eric Levengood
  • AL Longfield
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    Based on the results of a recent survey of University of Chicago Graduate School of Business alumni, the authors of this article suggest that prevailing corporate practice in valuing overseas investments reflects a flawed understanding of finance theory. Although the survey finds that almost all respondents use the discounted cash flow (DCF) method in some fashion or another, there is significant variation both in the application of DCF and in the weighting that different groups assign to DCF in dealing with segmented markets. Of greater interest, the survey also shows that, as the complexity and uncertainty involved in valuation tasks increases, practitioners appear to place greater reliance on heuristics, or conventional rules of thumb. And in relying on heuristics as perceived risk increases, the authors warn, "people tend to become less consistent, less systematic, and less rigorous in the methods they use to measure and evaluate risk." 1998 Morgan Stanley.

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    Article provided by Morgan Stanley in its journal Journal of Applied Corporate Finance.

    Volume (Year): 11 (1998)
    Issue (Month): 3 ()
    Pages: 82-99

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    Handle: RePEc:bla:jacrfn:v:11:y:1998:i:3:p:82-99
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