A Critical Investigation of the Standard Discounted Cash Flow Model for High-growth Companies: A Practical Analysis

Lukas Haertler & Julian Laurenz Seeber

Student thesis: Master thesis

Abstract

Purpose: The purpose of this research paper is to analyse the ability of the standard discounted cash flow model to value high-growth companies. In particular, it tries to identify the challenges arising with the valuation of high-growth companies in a dynamic business environment and provides potential solutions on how to improve the standard discounted cash flow model to value high-growth companies more accurately. Special attention is directed towards the strategic as well as the technical aspects of the standard discounted cash flow model.
Design: The research method chosen to analyse the valuation of high-growth companies using the standard discounted cash flow model is a case study conducted with Tesla as a case company. The study is based on a broad range of secondary qualitative literature and quantitative data.
Findings: The study shows that the standard discounted cash flow model has to face several issues when valuing high-growth companies like Tesla. Problems arise in the strategic analysis and the technical valuation. Valuing a high-growth company such as Tesla using the standard discounted cash flow model is challenging since not only Tesla has a rapid speed of change but also the current economy developed further compared to the economy at the time the standard discounted cash flow model was developed. However, since the discounted cash flow model can be applied very dynamically and can be changed through various adaptations and extensions, it is nevertheless also possible to value very dynamic companies like Tesla. Thus, the model should be applied and adapted more flexible to the characteristics of the analysed company.
Value: This study combines and extends the existing research by analysing each component of the discounted cash flow model by using the case company Tesla to identify challenges arising in a dynamic and fast-moving market environment. The study provides practical insights to solve these challenges and to receive a more accurate valuation of the company at hand.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages121
SupervisorsSvend Peter Malmkjær