Business Valuation of Discounted Cash Flow

Abstract

This study critically evaluates business valuation methods, concluding that the Free Cash Flow (FCF) method is the most effective approach for determining a company's value. The study empirically supports this assertion through a detailed valuation of Honda Atlas Cars (Pakistan), comparing the Free Cash Flow and Asset-Based approaches. The findings highlight the superiority of the Free Cash Flow method, which relies on projected future values based on the preceding year’s financial data, enhancing its predictive accuracy. The study aligns with existing research affirming that the Free Cash Flow method is the preferred valuation approach. A comparative analysis reveals that while both the Free Cash Flow and Asset-Based methods yield positive valuation results, the Discounted Cash Flow (DCF) technique—an extension of the Free Cash Flow approach—demonstrates even greater accuracy. This finding underscores the importance of incorporating future cash flows and the time value of money into valuation decisions. The implications for shareholders are significant, as the calculated net value of a company directly influences investment decisions. A positive net value indicates a strong investment opportunity, whereas a negative valuation suggests caution. Given that Honda Atlas Cars (Pakistan) exhibits positive valuation outcomes under both methods, the study recommends that shareholders prioritize the Discounted Cash Flow approach due to its refined evaluation of projected cash flows. By emphasizing the predictive strength of Free Cash Flow-based valuation models, this research contributes to the broader discourse on financial decision-making, offering valuable insights for investors, financial analysts, and corporate managers seeking accurate business valuation techniques.