MEASURING THE FIRM VALUE BY DISCOUNTED CASH FLOWS: PRINCIPLES AND ISSUES OF VARIOUS MODELS

Mihaela Diaconu
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Mihaela Diaconu: ”Gheorghe Asachi” Technical University Department of Engineering and Management

Annals of University of Craiova - Economic Sciences Series, 2015, vol. 2, issue 43, 345-355

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.

Keywords: value of firm; equity value; debt value; cash flow; dividend; operating income (search for similar items in EconPapers)
JEL-codes: G32 G35 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:aio:aucsse:v:2:y:2015:i:43:p:345-355

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