Business Valuation of Discounted Cash Flow

Abstract

This study critically examines business valuation methods, culminating in the conclusion that the Free Cash Flow (FCF) method stands out as the superior approach for determining the value of a business. The empirical validation of this assertion is demonstrated through a detailed valuation of Honda Atlas Cars (Pakistan). Employing two distinct methods, the Free Cash Flow and Asset-Based approaches, the research unveils the supremacy of the Free Cash Flow method, substantiated by meticulous calculations and comparative analysis. Notably, the Free Cash Flow method's reliance on forecasted future values, rooted in the preceding year's financial data, enhances its predictive accuracy. Aligning with the findings of numerous researchers in the field, this study affirms the consensus that the Free Cash Flow method reigns supreme. The implications for shareholders are paramount, as the calculated net value becomes a pivotal factor in their decision-making process. Positive net values signal investment opportunities, while negatives advise caution. In the case of Honda Atlas Cars (Pakistan), both Free Cash Flow and Asset-Based approaches yield positive values; however, the Discounted Cash Flow (DCF) calculation, an enhancement of the Free Cash Flow method, surpasses the Asset-Based approach. As a result, shareholders are advised to base their decisions on the Discounted Cash Flow method, leveraging its nuanced evaluation of future cash flows and the time value of money.