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CHAPTER 34: Overview and Conclusion > CHOOSING THE RIGHT DISCOUNTED CASH FLOW M...
CHOOSING THE RIGHT DISCOUNTED CASH FLOW MODEL
The model used in valuation should be tailored to match the characteristics of the asset being valued. The unfortunate truth is that the reverse is often true. Time and resources are wasted trying to make assets fit a prespecified valuation model, either because it is considered to be the best model or because not enough thought goes into the process of model choice. There is no one best model. The appropriate model to use in a particular setting will depend on a number of the characteristics of the asset or firm being valued.
FIGURE 34.7 Views on Market and Valuation Approaches
BRIDGING THE PHILOSOPHICAL DIVIDE
Philosophically, there is a big gap between discounted cash flow valuation and relative valuation. In discounted cash flow valuation, we take a long-term perspective, evaluate a firm's fundamentals in detail, and try to estimate a firm's intrinsic value. In relative valuation, we assume that the market is right on average and estimate the value of a firm by looking at how similar firms are priced. There is something of value in both approaches, and it would be useful if we could borrow the best features of relative valuation while doing discounted cash flow valuation, or vice versa.