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Measuring The Firm Value By Discounted Cash Flows: Principles And Issues Of Various Models

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  • Mihaela Diaconu

    (”Gheorghe Asachi” Technical University Department of Engineering and Management)

Abstract

This paper comprises an examination of the principles of company evaluation using in the discounted cash flow models. In this context, we take into account both the evaluation of the entire business and the alternative of equity valuation by discounted dividends and free cash flows. Although the discounted cash flows to equity can be seen as a better alternative to determine the firm's market value when the dividends are established according to the available cash, the disadvantage of using that approach is that the cash flows related to debt have to be considered explicitly in the model. Also, if we consider the indirect equity valuation, the convergence of the result with the value obtained by applying direct evaluation technique will depend on the correctness of evaluating the firm and the suppositions used about firm’s leverage and expected net income.

Suggested Citation

  • Mihaela Diaconu, 2015. "Measuring The Firm Value By Discounted Cash Flows: Principles And Issues Of Various Models," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 2(43), pages 345-355.
    • Handle: RePEc:aio:aucsse:v:2:y:2015:i:43:p:345-355
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    File URL: http://feaa.ucv.ro/AUCSSE/0043v2-032.pdf
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    References listed on IDEAS

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    1. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
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    More about this item

    Keywords

    value of firm; equity value; debt value; cash flow; dividend; operating income;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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