THE DISCOUNTED CASH FLOW APPROACH TO FIRM VALUATION

This thesis presents a critical discussion concerning shortcomings of the discounted\ncash flow (DCF) model as it is used in firm valuation. It focuses on the\nestimation of the future performance of a firm. The implications of the shortcomings\nare discussed and methods to overcome them are argued for. The\nthesis aims at contribute to the ever present process of improving firm valuation.\nThe information used to implement this thesis comes primarily from secondary\ndata sources in the form of financial literature as well as figures from databases.\nThe study was conducted in two parts, one theoretical and one empirical\npart.\nIn the literature study it was found that one way to improve the DCF model\nwould be to forecaste the future sales of a firm by utilizing a causal method\napproach (CMA). The CMA was applied on the case company Peab AB\nthrough a multiple regression model. The empirical implications were found to,\nsomewhat, limit the merits of the CMA.\nThe general conclusion of the study is that analysts should strive to make the\nvaluation process as scientific as possible. This minimizes the valuation’s exposure\nto subjectivity from the analyst and, hence, improve the reliability of the\nvaluation. It could be achieved by applying the suggested CMA when transforming\na qualitative strategic perspective of the firm’s future development into\na quantitative financial perspective. Furthermore, by explicitly stating assumptions\nand views, the reliability of the valuation can be assessed by the investors\nacting on the information. These measures will improve the DCF model as a\ntool in the decision-making situation.