IDEAS home Printed from https://ideas.repec.org/a/bpj/jbvela/v7y2012i1n3.html
   My bibliography  Save this article

Valuation of Cash Flows with Time-Varying Cessation Risk

Author

Listed:
  • Saha Atanu

    (Compass Lexecon)

  • Malkiel Burton G.

    (Princeton University)

Abstract

We extend the analytical framework of traditional DCF models to allow for the possibility of a time-varying cessation risk for cash flows. We first set out a parsimonious functional form for time-dependent survival probability of cash flows and then derive a closed-form solution for cessation risk-adjusted discount rates within a DCF model. Application of the model to a new data set, created for this paper, demonstrates that U.S. start-up firms face considerable risk of cessation, particularly during the first five years of their existence. This finding suggests that the time-varying discount rates that are appropriate to value them are considerably higher than those used in traditional DCF models.

Suggested Citation

  • Saha Atanu & Malkiel Burton G., 2012. "Valuation of Cash Flows with Time-Varying Cessation Risk," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 7(1), pages 1-22, May.
    • Handle: RePEc:bpj:jbvela:v:7:y:2012:i:1:n:3
    DOI: 10.1515/1932-9156.1126
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/1932-9156.1126
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/1932-9156.1126?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kenth Skogsvik & Stina Skogsvik & Henrik Andersson, 2023. "Bankruptcy Risk in Discounted Cash Flow Equity Valuation," JRFM, MDPI, vol. 16(11), pages 1-18, November.
    2. Dietmar Ernst & Werner Gleißner, 2022. "Paradigm Shift in Finance: The Transformation of the Theory from Perfect to Imperfect Capital Markets Using the Example of Company Valuation," JRFM, MDPI, vol. 15(9), pages 1-13, September.
    3. Sujata Behera, 2020. "Does the EVA valuation model explain the market value of equity better under changing required return than constant required return?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-23, December.

    More about this item

    Keywords

    DCF; valuation; cessation risk;
    All these keywords.

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:jbvela:v:7:y:2012:i:1:n:3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.