What is the major difficulty with using discounted cash flow approaches to estimate a stock's intrinsic value?
A)Prices in the stock market move from moment to moment.
B)Small changes to the assumptions of k or g result in major changes in the estimated value.
C)It is extremely unlikely that a stream of cash flows will continue to grow at the same rate.
D)The relative valuation techniques are more accurate approaches.

Question

Quizplus · Accepted Answer

The major difficulty with using discounted cash flow approaches to estimate a stock's intrinsic value is that small changes to the assumptions of the discount rate (k) or growth rate (g) can result in major changes in the estimated value. This sensitivity to assumptions makes DCF analysis less reliable than other valuation methods in some cases. Prices in the stock market moving from moment to moment (A) is a factor affecting stock trading, but not necessarily a difficulty in using DCF approaches. It is true that a stream of cash flows may not continue to grow at the same rate (C), but this does not necessarily render DCF analysis useless. Relative valuation techniques (D) may be more accurate in some cases, but this does not necessarily mean that they are always the better choice.

What Is the Major Difficulty with Using Discounted Cash Flow