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Question 22 Unsaved Essay: 100 words max) Explain two potential errors that can dramatically impact the...

Question 22 Unsaved Essay: 100 words max) Explain two potential errors that can dramatically impact the results of your DCF valuation and how you might approach minimizing errors.

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Answer #1

Two potential error are:
1. Future Cash flows prediction: Predicting future cash flows is really challenge and creates error in discounted cash flows calculation. Including factors like exchange rate fluctuations, demand fluctuation, interest rate fluctuations can impact the increase or decrease in cash flow which is very difficult to predict. Usually companies assume fixed growth which is mistake considering the volatility in earnings.
2. WACC calculation: The Wacky is calculated using theoretical models like CAPM models which may not be accurate. The debt equity ratio of firms is not fixed and keeps on changing. Using same WACC to discount future cash flows through its life period is erroneous as WACC will be different in different period in real life conditions

Best of Luck. God Bless

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