Archive 2023-179: Nailing Down the Numerator in the Discounted Cash Flow Method

VPS StraightTalk Webinar Series: Nailing Down the Numerator in the Discounted Cash Flow Method

Speakers: Jim Alerding, CPA/ABV and Carli D. Lehr, CPA, CVA, CSEP

Countless books, presentations, and methods detail how to determine the cost of capital – the denominator – to be used in the discounted cash flow method of valuing a business. While valuation professionals can debate into perpetuity about basis points in the discount rate, we often overlook factors in the cash flow stream – the numerator – that can have a much more significant impact on the value of the company.

This presentation will discuss the importance of determining a reasonable and reliable projected cash flow stream when implementing the DCF method and ways to test the reasonableness of the forecasts or projections provided by management relied upon in your DCF calculation.

Learning Objectives:

The participant will learn:

• How to differentiate between a forecast and a projection
• The importance of using a reliable cash flow forecast or projection in applying the discounted cash flow method of valuation
• How to review or assist with the preparation of a forecast or projection to ensure the underlying assumptions are valid
• How to evaluate the specific risk to the overall valuation that should be considered given the status of the forecast or projection
• Lessons from court cases regarding the use of forecasts
• What our business valuation standards say about the use of prospective financial information in valuations

Handouts