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The Validity of Company Valuation Using Discounted Cash Flow Methods

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  • Florian Steiger

Abstract

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.

Suggested Citation

  • Florian Steiger, 2010. "The Validity of Company Valuation Using Discounted Cash Flow Methods," Papers 1003.4881, arXiv.org, revised Apr 2010.
    • Handle: RePEc:arx:papers:1003.4881
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    File URL: http://arxiv.org/pdf/1003.4881
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    References listed on IDEAS

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    1. 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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    Cited by:

    1. Sujata Behera, 2020. "Does the EVA valuation model explain the market value of equity better under changing required return than constant required return?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-23, December.
    2. Frederick DUBE & Brian BARNARD, 2019. "Equity Valuation based on a Random Process Modelling of Earnings and Equity Growth," Expert Journal of Economics, Sprint Investify, vol. 7(1), pages 1-31.
    3. Teng Andrea Xu & Jiahua Xu & Kristof Lommers, 2022. "DeFi vs TradFi: Valuation Using Multiples and Discounted Cash Flow," Papers 2210.16846, arXiv.org.
    4. Yesim Tokat-Acikel & Marco Aiolfi & Yiwen Jin, 2021. "Multi-Asset Value Payoff: Is Recent Underperformance Cyclical?," JRFM, MDPI, vol. 14(10), pages 1-17, October.

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