What is the discounted cash flow method?

The discounted cash flow method approaches business valuation from a different angle. The method is based on the cash flows of the company to be valued that can be distributed to the shareholders. The distributable cash flows must be discounted in exactly the same way as in the capitalized earnings approach. The discount rate is derived from the base rate and the risk rate.

The bottom line is that, given the same assumptions, the discounted cash flow method arrives at the same company valuations as the capitalized earnings method. They are just two different methodological paths to the company value.

In addition to the capitalized earnings method and the discounted cash flow method described here, the much simpler multiplier method is also widely used.


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