The discounted cash flow (DCF) method is a widely adopted methodology for the valuation of public and private companies in Canada. The following blog article explores how this methodology, as well as other valuation methodologies, are applied in practice and whether certain methodologies are more appropriate than others for differing valuation purposes. In particular, we explore why certain methodologies, and not the DCF, appear to be more common in the areas of tax valuations, matrimonial and commercial litigation, and whether this promotes more accurate and reliable business valuations.
A Background on the DCF
The DCF was born from finance theory. Following the stock market crash of 1929, DCF analysis gained popularity as a valuation method for stocks. Irving Fisher in his 1930 book The Theory of Interest and John Burr Williams’s 1938 text The Theory of Investment Value first formally expressed the DCF method in modern economic terms.