Valuation when Cash Flow Forecasts are Biased

Richard S. Ruback ()
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Richard S. Ruback: Harvard Business School, Finance Unit

No 11-036, Harvard Business School Working Papers from Harvard Business School

Abstract: This paper focuses adaptations to the discount cash flow (DCF) method when valuing forecasted cash flows that are biased measures of expected cash flows. I imagine a simple setting where the expected cash flows equal the forecasted cash flows plus an omitted downside. When the omitted downside is temporary, the adjustment is to deflate the forecasts and to set the discount rate equal to the cost of capital. However, when the downside is permanent, the adjustment is to deflate the cash flows and to increase the discount rate so that it includes the cost of capital plus the probability of a downside.

Pages: 29 pages
Date: 2010-10
New Economics Papers: this item is included in nep-acc and nep-for
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Citations: View citations in EconPapers (3)

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