Question

Discounted cashflow valuations are usually based upon the assumption that the firm will survive as a going concern. If you are valuing a young firm or a distressed firm where there is a significant likelihood that the firm will not make it as a going concern, how do you reflect that in your valuation?

Answer 1

The merit of the Discounted Cash Flow method is that it values a firm on the basis of future performance. Young firm in that case might not have realized any historical performance so the DCF method is more suitable as it weighs future performance in that case

So in order to do such valuation we would need to create a financial plan, cost expenses and investments for the year ahead.

In case of distressed firm where there is a likelihood of company not surviving next year, again it is easier to compute profitability and future cash flow. We can in this case as well estimate the expected cash flows and use the expected values in our valuation.