Finance Formulas / July 18, 2018 / Kenzie Kennedy
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.
Continuous compounding is the mathematical limit that compound interest can reach if it's calculated and reinvested into an account's balance over a theoretically infinite number of periods. While this is not possible in practice, the concept of continuously compounded interest is important in finance. It is an extreme case of compounding, as most interest is compounded on a monthly, quarterly or semiannual basis.
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