Advantages and Disadvantages of DCF Method

I have already written about discounted cash flow method of valuation now let’s look at some of the advantages and disadvantages of DCF method

Advantages of discounted cash flow method –

1. It can be applied for valuing business as a whole and also for valuing individual business components of a company or firm.

2. It is simple to understand and apply and also if needed it can be modified to deal with complex circumstances also.

3. It can be used by both equity shareholders because on the basis of DCF valuation they can compare two companies and take decision whether to invest or not, and also debt holders can use DCF method to take decision regarding the company.
Disadvantages of discounted cash flow method

1. Since it is a valuation tool it is dependent heavily on the inputs used for valuation purpose, so if inputs are changed slightly there can be large change in the value of a company.

2. Also since it makes use of future cash flows as an input, which we all know, are difficult to predict for any company and hence the success of DCF method is directly related to whether one can predict the future cash flows accurately or not.

Therefore anybody who is using discounted cash flow method should also use other methods of valuation along with in order to take right decision regarding the investment in the company.

0 comments… add one

Leave a Comment

Related pages

merits of globalisationassumptions of law of diminishing returnsoperating cycle in financeexplicit cost implicit costduality concept of accountingaccounting treatment of contingent liabilitiescosting and pricing methodsideal ratio of debt equity ratiodifference between factoring and discountingnondurable goods examplessystematic risk and unsystematic risk pdfwhat is the full form of swotcompetitive advantages and disadvantagesfinancial derivatives pptcharacteristics of job order costing systemexplicit cost vs implicit costcapitalist society disadvantagesautocratic leadersscheduled commercial banks meaningdemerits of dictatorshipunearned fees journal entryprinciple of conservatism in accountingexamples of accounting conventionsselling debenturesexamples of inferior goods in economicsfactors that affect elasticity of demandfactoring and discountingdefine securitizefifo advantages and disadvantagesadjusting entry for unearned rentunitary elastic demand graphcentrally planned economy advantagescash flow statement wikipayback period financeadvantages of authoritarian leadership styledebt factoring advantages and disadvantagesadvantages and disadvantages market economycharacteristics of monopoly and oligopolyadvantages and disadvantages of oligopoly competitiondefine normal good in economicsdeferred revenue journal entrymarket skimming pricing examplesstrengths of socialismtrial balance is prepareddefinition of drawee and drawerdifference between a debtor and a creditorjournal entry for provision for expensesdefinition of derivative marketmerits of privatizationaccrued interest meaningdisadvantages of debit cardsfifo advantagesadvantages and disadvantages of bank loansindustrialization advantageswholesale banking definitionwhat is a consignerbenefits of merging companiesadvantages of takeoversdisinflation refers to a situation wherewhat is slr crrlaw of diminising marginal utilitydisadvantages of cash managementdisadvantages of paybacksupplementary goods economicsbarter system in economicsdirect quotation currencybenefits and drawbacks of capitalismmerits of dictatorshipecs clearingpure competition market examplesdrawer and draweedisadvantages of a command economywhat is the full meaning of fmcgmanufacturing overhead examplesadvantages of autocratic leadership