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Finance Formulas / July 13, 2018 / Chanel Cleveland

Discounted cash flow models are powerful, but they do have shortcomings. DCF is merely a mechanical valuation tool, which makes it subject to the axiom "garbage in, garbage out." Small changes in inputs can result in large changes in the value of a company. Instead of trying to project the cash flows to infinity, terminal value techniques are often used. A simple annuity is used to estimate the terminal value past 10 years, for example. This is done because it is harder to come to a realistic estimate of the cash flows as time goes on.

The DebtEquity (DE) ratio can be applied to personal financial statements as well, in which case it is also known as the Personal DebtEquity Ratio. Here, "equity" refers not to the value of stakeholders’ shares but rather to the difference between the total value of an individual’s assets and the total value of his or her debt or liabilities.

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