Advantages and Disadvantages of DCF Method

I have already written about discounted cash flow method of valuation now let’s look at some of the advantages and disadvantages of DCF method

Advantages of discounted cash flow method –

1. It can be applied for valuing business as a whole and also for valuing individual business components of a company or firm.

2. It is simple to understand and apply and also if needed it can be modified to deal with complex circumstances also.

3. It can be used by both equity shareholders because on the basis of DCF valuation they can compare two companies and take decision whether to invest or not, and also debt holders can use DCF method to take decision regarding the company.
Disadvantages of discounted cash flow method

1. Since it is a valuation tool it is dependent heavily on the inputs used for valuation purpose, so if inputs are changed slightly there can be large change in the value of a company.

2. Also since it makes use of future cash flows as an input, which we all know, are difficult to predict for any company and hence the success of DCF method is directly related to whether one can predict the future cash flows accurately or not.

Therefore anybody who is using discounted cash flow method should also use other methods of valuation along with in order to take right decision regarding the investment in the company.

0 comments… add one

Leave a Comment


Related pages


disadvantage of command economydisadvantages of delegationfull convertibilitydiff between micro and macro economicsmeaning consigneesemi durable goods exampleswhat are the different types of dividend policiesdisadvantages of advertisementsebit accountingexplain barter systemdefine privatisationprepaid insurance journal entry adjustmentsdisadvantages of cashless policyexample of conglomeratefmcg full formasset vs liability definitionfictitious assets definitionaudit evidencesbenefits of swot analysisconglomerate company definitiondisadvantages of activity based budgetingadvantages of autocracydifference between capitalist socialist and mixed economypenetration pricing exampleadvantage and disadvantage of payback period methodwhat are disadvantages of globalizationwhat are examples of inferior goodsbartering system definitioncharacteristics of oligopoly market structuredictatorship advantages and disadvantagessubstitutable goodsdifference between consignor and consigneefii fdiexample of conglomerate mergerconglomerate integration definitioninelastic examplesaccounting horizontal analysiswhat are current liabilities examplesassumptions of diminishing marginal utilitypricing skimmingprivate goods economicslimitations of marginal costingwhat are the advantages and disadvantages of a market economybank reconciliation statement is prepared byadvantages of marketing segmentationjunk bonds meaningprofibility ratiowhat is a major reason for conglomerate mergersbank overdraft advantages and disadvantagesassumptions of diminishing marginal utilitytutor2u monopolymeaning cagrwhat are the advantages and disadvantages of a command economyunearned revenue in accountingdifficulties of barter systemsocialism advantages and disadvantagesdecentralized decision making advantages and disadvantagesconglomerate organizationadvantage and disadvantage of internet bankingbluevsreddisadvantage of merger and acquisitionadvantages and disadvantages of activity based budgetingwhat are leverage ratiosdefine fictitious assetsexamples of unitary demandadvantages of fifomarket skimming and market penetration pricing strategiesdrawbacks of jitadvantages of carbon creditsdistinguish between cash discount and trade discountlaw of diminising marginal utilitymeaning of wholesaler and retailerfeatures of perfect competition and monopoly