Valuation of Cash Flows with Time-Varying Cessation Risk

Saha Atanu and Malkiel Burton G.
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Saha Atanu: Compass Lexecon
Malkiel Burton G.: Princeton University

Journal of Business Valuation and Economic Loss Analysis, 2012, vol. 7, issue 1, 22

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.

Keywords: DCF; valuation; cessation risk (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (3)

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DOI: 10.1515/1932-9156.1126

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