Variations on DCF Valuation
The discounted cash flow model described so far in this chapter is still the standard approach for estimating intrinsic value. However, variations on that approach also have the same objective. This section begins with a model in which we adjust the cash flows for risk, rather than the discount rate. Then we move on to the adjusted present-value model (where the effect of debt on value is separated from the operating assets) and excess-return models (where value is derived from earning excess returns on new investments).
Certainty-Adjusted Cash Flow Models
While most analysts adjust the discount rate for risk in DCF valuation, some prefer to adjust the expected cash flows for risk. In the process, they replace the ...