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Discounted cash flow method of valuation

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1. What are some problems associated with using the discounted cash flow method of valuation?

2. Beta measures risk. What are some other types of risk faced by investors?

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1. What are some problems associated with using the discounted cash flow method of valuation?
The method of estimating the cost of equity is called the discounted cash flow, or DCF method. With this method, it is easy to determine the dividend yield, but it is difficult to establish the proper growth rate. If past growth rates in earnings and dividends have been relatively stable, and if investors appear to be projecting a continuation of past trends, then g may be based on the firm's historic growth rate. However, if the company's past growth has been abnormally high or low, either because of its own unique situation or because of general economic ...

Solution Summary

The solution examines the discounted cash flow method of valuation. Beta measure risks are analyzed. Other types of risk faced by investors are determined. Beta measures risks are examined.

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