To: Reginald Middleton who wrote (30504 ) 2/19/1998 9:30:00 PM From: Chuzzlewit Read Replies (1) | Respond to
Reginald, I've been using DCF techniques for the past twenty years, and am well acquainted with its virtues as well as its pit-falls, and among the problems that I see in your approach is that (a) there is no measurement of the average weighted cost of capital - there is simply a range of kw's; (b) I agree that cash is king (that's why we talk DCF, not profits), but your growth assumptions make no sense because you posit 1%, 2.5% and 4% perpetual growth rates. These are undoubtedly incorrect because the whole assumption of perpetual growth is incorrect (that is, you created it as a surrogate for an unknown stream of cash flows). So what you are trying to do is collapse this unknown stream of free cash flows into an equivalent stream assuming perpetual growth. Clearly, this cannot be done in the absence of a meaningful discount rate (which is measured, not assumed) and in the absence of an explicated free cash flow stream.
