Valuation When Cash Flow Forecasts are Biased

29 Pages Posted: 9 Oct 2010 Last revised: 16 Oct 2010

Date Written: October 14, 2010


This paper focuses adaptations to the discount cash flow (DCF) method when valuing forecasted cash flows that are biased measures of expected cash flows. I imagine a simple setting where the expected cash flows equal the forecasted cash flows plus an omitted downside. When the omitted downside is temporary, the adjustment is to deflate the forecasts and to set the discount rate equal to the cost of capital. However, when the downside is permanent, the adjustment is to deflate the cash flows and to increase the discount rate so that it includes the cost of capital plus the probability of a downside.

Suggested Citation

Ruback, Richard S., Valuation When Cash Flow Forecasts are Biased (October 14, 2010). Harvard Business School Finance Working Paper No. 11-036, Available at SSRN: or

Richard S. Ruback (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6422 (Phone)
617-496-8443 (Fax)

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