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Valuation when Cash Flow Forecasts are Biased

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  • Richard S. Ruback

    (Harvard Business School, Finance Unit)

Abstract

This 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.

Suggested Citation

  • Richard S. Ruback, 2010. "Valuation when Cash Flow Forecasts are Biased," Harvard Business School Working Papers 11-036, Harvard Business School.
    • Handle: RePEc:hbs:wpaper:11-036
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    References listed on IDEAS

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    1. Marc Zenner & Tomer Berkovitz & John H.S. Clark, 2009. "Creating Value Through Best‐In‐Class Capital Allocation1," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(4), pages 89-96, September.
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    Cited by:

    1. Marcin Dec, 2021. "From point through density valuation to individual risk assessment in the discounted cash flows method," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5621-5635, October.
    2. Marcin Dec, 2019. "From point through density valuation to individual risk assessment in the discounted cash flows method," GRAPE Working Papers 35, GRAPE Group for Research in Applied Economics.
    3. CLERE, Roland & MARANDE, Stephane, 2018. "Default risk and equity value: forgotten factor or cultural revolution?," MPRA Paper 85659, University Library of Munich, Germany.

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    1. Marcin Dec, 2019. "From point through density valuation to individual risk assessment in the discounted cash flows method," GRAPE Working Papers 35, GRAPE Group for Research in Applied Economics.
    2. Marcin Dec, 2021. "From point through density valuation to individual risk assessment in the discounted cash flows method," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5621-5635, October.

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