Abstract
The current contribution examines the limits of the Discounted Cash Flow methods, often denounced by Jacques Richard. We defend the idea that beyond the already famous shortfalls that the evaluation methods have demonstrated, those may extend when applied in a very different context, i.e. the one of financial reporting. Indeed the change of set, the loss of unity in capital budgeting decision and risk awareness may increase the potential misuses of the method. Finally, we demonstrate that the concept of infinite life loses consistency in such a framework.
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Notes
- 1.
The first one considers that the price of a share equates the discounted value of the future dividends, while the second adds the assumption of a constant dividend growth rate. Designed in the 1950s, the formulae fit a very flat non-volatile market. Other variations exist: the Bates and Modlowosky models are examples.
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Blum, V. (2016). Fair Value and Discounted Cash Flows: Value Creation or Sense Destruction?. In: Bensadon, D., Praquin, N. (eds) IFRS in a Global World. Springer, Cham. https://doi.org/10.1007/978-3-319-28225-1_7
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DOI: https://doi.org/10.1007/978-3-319-28225-1_7
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