Discounted cash flow approach to valuation does not work in the case of options because:
A) it is possible to but difficult to estimate the expected cash flows.
B) the estimated cash flows have to be discounted at the opportunity cost of capital.
C) finding the opportunity cost of capital is impossible as the risk of options change every time the stock price moves.
D) (B) and (C) above

Question

Quizplus · Accepted Answer

Discounted cash flow does not work for options because the risk and opportunity cost of capital change with stock price movements, making it difficult to apply a consistent discount rate.

Discounted Cash Flow Approach to Valuation Does Not Work in the Case