In November, we wrote a post on the biggest mistake in a Discounted Cash Flow (“DCF”) model. There are, of course, a number of other mistakes (albeit smaller in comparison) that can creep into a DCF. And surprisingly, you would find these mistakes being committed by amateurs and professionals alike. Yes, even investment bankers and equity research analysts don’t dot their i’s and cross their t’s!
In this post, we simply list out the top 10 mistakes and how to avoid them. Over the course of the next few weeks/ months, we’ll delve a little deeper into each to understand what the mistake is, its consequences and how we can correct for it.
So, here’s the list of the top 10 mistakes in a DCF:
Note that we are not suggesting that you will arrive at the “accurate” value of the firm simply by correcting for the above. After all, the intrinsic value of a company is a range and it would be foolhardy to believe that one can come up with a precise value. However, correcting for these mistakes will allow you to take control of your DCF and be certain that there are no fundamental mistakes in it. It can then allow you to concentrate on testing your assumptions for reasonableness and spend more time on refining them.
Have you come across any mistakes in your work other than those listed above? Let us know and we’d add them to our list.