Discounted Cash Flow Methods for Equity Valuation

Abstract

Most applied methods of valuing a firm's equity are based on discounted cash flow and relative valuation models. Although stock and firm valuation is very strongly tilted toward the use of discounted cash flow methods, it is impossible to ignore the fact that many analysts use other methods to value equity and entire firms. The primary alternative valuation method is relative valuation. Both discounted cash flow and relative valuation methods require strong assumptions and expectations about the future. No one single valuation model or method is perfect. All valuation estimates are subject to model error and estimation error. Keywords: discounted cash flow; relative valuation; model error; estimation error; fair market price; dividend discount model; intrinsic value; free cash flow; Management Science; The Theory of Investment Value; Liabilities and Equity