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Business valuations and market efficiency

Illustrations and further practice

Now try TYU questions 6 and 7 from Chapter 20.

4.4 Strengths and weaknesses of the discounted cash flow basis

Strengths Weaknesses

 Theoretically the best method  Relies on estimates of cash
(as the PV of the future cash flows and discount rates.
flows represents the

shareholder wealth increase).  Difficulty in choosing a time
horizon.

 Can be used to value all or part
of a company.  Difficulty in valuing a company’s
worth beyond this time horizon.

 Assumes that discount rates,
tax and inflation rates are
constant over the period.

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