Assessment of the DCF Method in Company Valuation

Abstract

This paper deals with the yield valuation method of a company based on discounted cash flows (DCF). The aim of this paper is to evaluate its suitability in practice and expose its weak and strong points. For this purpose, financial plans for over 5 years were collected from 40 companies which meet the criteria of a small accounting entity according to the categorisation of accounting units. On the basis of the collected data, the value of equity was calculated using the DCF method. These values were subsequently compared with the original value of equity. Statistical tests verified if the differences between the book value of equity and the value of equity calculated by the DCF method are statistically significant. Further tests were applied to determine whether the DCF method gives lower or higher value of equity than its book value.