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Discounted cash flow

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Discounted cash flow valuation and valuation using multiples of comparable firms are alternate approaches to valuation of a firm. Some favor DCF methods, labeling them as conceptually correct, yet, many business brokers and others in the financial community make widespread use of multiples.

Given the characteristics of the two approaches, why do you think this discrepancy exists?

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Solution Summary

The solution compares and contrasts the Discounted cash flow method with the multiples method.

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DCF uses the future free cash flows of the company discounted by the firm's weighted average cost of capital (the average cost of all the capital used in the business, including debt and equity), plus a risk factor measured by beta. Beta is an adjustment that uses ...

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