Essay: Why Free Cash Flows as Firm Valuation Method

Essay: Why Free Cash Flows as Firm Valuation Method
12/04/2011 Comments Off on Essay: Why Free Cash Flows as Firm Valuation Method Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

The advantage of this cash flow method is that it can be applied to accompany that does not pay dividend, a privately held company or even a division of it. It requires no assumptions regarding the time of payments of dividend to share holders. It also incorporates the time value of money factor and the risk associated with generation of future free cash flows. Discounted cash flows method is more immune to the market fluctuations and investors’ perceptions as they represent the intrinsic value. This approach works best when the cash flows are most of the time positive and stable, and investors have relatively long term horizon.

While adopting this technique, investors are mainly concerned about the total operating cash flow. They simply subtract the money needed for new investments like buying fixed assets and liabilities etc from the cash available in the future of the business. This technique is mostly used method in real estate, investment houses and corporate valuation. The main disadvantage of this method is that it requires a lot of information as input to find the figures. These inputs can be manipulated by expert analyst. It is lengthy way and may become noisier during the calculation.

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