Every asset that generates cash flows has an intrinsic value that reflects both its cash flow potential and its risk. Many analysts claim that when significant uncertainty about the future exists, estimating intrinsic value becomes not just difficult but pointless. But we disagree. Notwithstanding this uncertainty, we believe that it is important to look past market perceptions and gauge, as best we can, the intrinsic value of a business or asset. This chapter considers how discounted cash flow valuation models can be utilized to estimate intrinsic value and describes estimation details and possible limitations in the models.
Discounted Cash Flow Valuation
In discounted cash flow (DCF) valuation, an asset’s value is the ...