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Fancy answering this real life investment banking interview question❓
What are some of the downside of using a DCF to value a business?
DCF analysis, a cornerstone of valuation, can be a powerful tool.
However, it's not without its shortcomings.
📊 Irrelevant assumptions: Analysts assume that the business will continue to generate cash flow to perpetuity. (Average age of S&P companies is 21 years - Which is the oldest company?)
🤏Sensitivity: Small changes to assumptions can lead to significantly different valuations.
🔮 Terminal Value: TV in most cases accounts for more than 80% of the value of the company - Predicting future cash flows beyond the modelling period can be challenging.
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