Finance Formulas / July 13, 2018 / Cecelia Weiss
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 tier 1 capital ratio is the basis for the Basel III international capital and liquidity standards devised after the financial crisis, in 2010. The crisis showed that many banks had too little capital to absorb losses or remain liquid, and were funded with too much debt and not enough equity.
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