Discounted Cash Flow Valuation Model Consistency Study

Various discounted cash flow models have already been applied to practice by valuators and researchers.But the results of company valuation made by different discounted cash flow model appear dissimilarity. Many people think that this kind of circumstance is normal,for different models are quoted.This paper makes a further study towards consistency of valuation result made by four kinds of discounted cash flow models(free cash flow to firm method,equit cash flow method,capital cash flow method and adjusted present value method).Firstly,this paper introduces traditional expressions of discounted cash flow models and considers that traditional discounted cash flow models are not applicable to the situation that discounted rate changes continuously. So this paper improves the models,which extends the usage scope of models.At the same time,this paper defines the expression of cash flow and the relation between cash flow.And this paper also introduces the method of computing discounted rates.All of these can provide more extensive foundation for consistancy analysis.The tax shield value theorie is one of the most important factors in influencing the parameters.And this paper tallys up most important tax shield value theories,which can do cushion for the consistency analysis.This paper put forward assumptions of four discounted cash flow models ,which defines the usage scopes of the models fittingly.Then,under three kinds of circumstances(cash flow are constant with zero growth rate, cash flow are constant with fixed growth rate and cash flow are finite),this paper analys the applicability of different tax shield value theories,and adjusts the expression type of adjusted present value method according to the analytical result.Through making use of general expression of cost of equit put forward by Taggart at 1989 and CAPM,this paper deduces the relationship between parameters of the four models.Putting the parameters into discounted cash flow models and using the models in practice,the paper confirms that if we use discounted cash flow models correctly and also follow the assumptions,we can get consistant valuation result. In the process of consistency analysis,the paper finds out the method of solving circularity problem,which can make free cash flow to firm method and capital cash flow method be useful in fulfillment and make it possible that valuation results of the four model are consistant in practice.