Transversality and the Stochastic Nature of Cash Flows

19 Pages Posted: 1 Jan 2014  

Lutz Kruschwitz

Free University of Berlin (FUB) - Department of Business and Economics

Andreas Loeffler

Freie Universität Berlin

Date Written: December 31, 2013

Abstract

We show that a transversality condition is necessary when it comes to valuing a company with an infinite lifespan. Without transversality the firm value cannot be uniquely determined. Also, an assumption on a lower bound of cash flows is necessary to achieve the desired result. We discuss four different stochastic cash flow processes and analyze to what extent the processes associated with these enterprise values satisfy the transversality condition.

Keywords: transversality, discounted cash flow, mean reversion, autoregression

JEL Classification: G12

Suggested Citation

Kruschwitz, Lutz and Loeffler, Andreas, Transversality and the Stochastic Nature of Cash Flows (December 31, 2013). Available at SSRN: https://ssrn.com/abstract=2373744 or http://dx.doi.org/10.2139/ssrn.2373744

Lutz Kruschwitz

Free University of Berlin (FUB) - Department of Business and Economics ( email )

Boltzmannstrasse 20
D-14195 Berlin, 14195
Germany
+49 30 838-54631 (Phone)
+49 30 838-54468 (Fax)

Andreas Loeffler (Contact Author)

Freie Universität Berlin ( email )

Boltzmannstr. 20
Berlin, 14195
Germany

HOME PAGE: http://www.andreasloeffler.de

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