Discounted Cash Flow: Theoretical and Practical Aspects of its Use
DOI:
https://doi.org/10.14392/asaa.2023160309Keywords:
Discounted Cash Flow , Discount Rate , ValuationAbstract
Objective: This text presents an in-depth analysis of the theoretical and practical aspects of the discounted cash flow method and its applicability in evaluation processes.
Method: As it is a theoretical article, it draws on extensive literature and knowledge accumulated by the author over the years, much of it in undergraduate and postgraduate disciplines.
Results or Discussion: After a thorough exploration of the two pillars of the method - the discount rate and the cash flow - it becomes evident that the main methods widely adopted in the literature offer consistent results, supported by solid theoretical foundations. I bring a critical discussion about three crucial aspects for the practical application of this method. The first aspect highlights the use of multiples, revealing how this approach can, in certain cases, introduce significant distortions in the evaluation results. Next, I address the issue of the capital cost of free cash flow, demonstrating the importance of calculating this metric on the correct basis, using market values, instead of relying on historical values. Finally, I explore how the method can be effectively used in the value creation process, highlighting how this capacity can be perceived through the method's generic expressions.
Contributions: It is clear that, despite advances in research, there is still ample space in the literature for a more detailed and specific analysis of the challenges and opportunities associated with the use of discounted cash flow. This text reinforces the continued importance of this approach in the field of financial evaluation and highlights the need for constant improvement to guarantee solid and reliable results.
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