The Practical Application of Discounted Cash-Flow Based Valuation Methods

Title:

THE PRACTICAL APPLICATION OF DISCOUNTED CASH-FLOW BASED VALUATION METHODS Publication: Studia Universitatis Babes Bolyai – Oeconomica, LII, 2/2007 Author Name: Takács, András; Language: English Subject: Economy Issue: 2/2007 Page Range: 13-28 Summary: Valuation methods based on Discounted Cash-Flow (DCF) play a major role in the field of company valuation. The current literature contains a reasonably deep and detailed theoretical basis for DCFbased valuation, although, when starting to apply the techniques to evaluate a real company, some practical problems may appear. This study summarizes the most important practical difficulties which may hinder the valuation process and proposes different ways of solving these. Beyond the theoretical discussion, the author illustrates the techniques with a case-study, using the financial figures of a fictive firm. Keywords: company valuation; discounted cash-flow methods;

The Practical Application of Discounted Cash-flow-Based Valuation Methods

András TAKÁCS Faculty of Business and Economics, University of Pécs, Hungary

Abstract. Valuation methods based on Discounted Cash-Flow (DCF) play a major role in the field of company valuation. The current literature contains a reasonably deep and detailed theoretical basis for DCF-based valuation, although, when starting to apply the techniques to evaluate a real company, some practical problems may appear. This study summarizes the most important practical difficulties which may hinder the valuation process and proposes different ways of solving these. Beyond the theoretical discussion, the author illustrates the techniques with a case-study, using the financial figures of a fictive firm. Keywords: company valuation, discounted cash-flow methods

1. The general DCF model The discounted cash-flow models interpret a firm’s value as the present value of cash-flow generated by the firm in a specified future period. Future cash-flow should be discounted at an

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