There are three methods that are used in valuation: DCF, multiples and, options-based method. Each one has its pros and costs. However, the DCF method is the most used in valuation in the classroom. In this article, we address the question “Why is the DCF valuation method the most used method in valuation in the classroom?” (Note: we acknowledge that there is a debate on the most used valuation technique in practice vs. in the classroom. The multiples method may be more frequently applied in practice as it is far simpler!)
There are three methods that are used in valuation: DCF, multiples and, options-based method. Each one has its pros and costs. However, the DCF method is the most used in valuation in the classroom. And the DCF method is the most used in valuation in the classroom because it is closest to the definition of intrinsic valuation. Corporate finance theory states that the value of any asset is the sum of the present value of all future cash flows.
DCF valuation relies on time-tested principles of corporate finance. Further, the DCF valuation is flexible and can be used in a wide variety of industries and scenarios. It can accommodate detailed assumptions and variations. The DCF valuation is also relatively easy to understand and share with others. It allows for healthy debate and disagreements on specific assumptions. The DCF method also enables you to incorporate uncertainty with the use of scenario analysis.