Company Valuation Using the DCF Method and CAPM : You Shouldn't Trust the Result

Today, the determination of a company's value is mostly based on the discounted cash flow method (DCF method). In doing so, planned values of the cash flows (or income/flow-to-equity) provided by the company are usually discounted to the present with a calculated a discount rate based on the capital asset pricing model (CAPM). The CAPM cost of capital1 is based on the so- called beta factor, which in turn is derived from historical fluctuations in stock returns (of the company itself or companies in a peer group). The CAPM-world assumes perfect capital market thus refrains from rating and financing restrictions and the resulting insolvency risks