FIRM EVALUATION BY DISCOUNTING THE CASH FLOWS: THE PRINCIPLES OF THE MODELS AND THEIR APPLICABILITY

The present study comprises an examination of the principles of company evaluation used in the discounted cash flow models. In this context, we take into account both the evaluation of the entire business and the alternative of equity valuation by discounting the dividends and the free cash flows. Although discounting cash flows to equity can be seen as a better alternative to determine the market value of the firm if the dividends are established according to the available cash, the disadvantage of using the free cash flow to equity approach is that cash flows related to debt have to be considered explicitly in the model, that are difficult to assess in absolute terms. Also, if we consider the indirect equity valuation, the convergence of the result with the value obtained by applying direct evaluation will depend on the correctness of evaluating the firm and the suppositions used about firm's leverage and expected net income.