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Valuation of cash flows with time-varying cessation risk

Author(s): Saha, A; Malkiel, Burton G.

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Abstract: We extend the analytical framework of traditional DCF models to allow for the possibility of a time-varying cessation risk for cash flows. We first set out a parsimonious functional form for timedependent survival probability of cash flows and then derive a closed-form solution for cessation risk-adjusted discount rates within a DCF model. Application of the model to a new data set, created for this paper, demonstrates that U.S. start-up firms face considerable risk of cessation, particularly during the first five years of their existence. This finding suggests that the time-varying discount rates that are appropriate to value them are considerably higher than those used in traditional DCF models.
Publication Date: 1-Jan-2012
Citation: Saha, A, Malkiel, BG. (2012). Valuation of cash flows with time-varying cessation risk. Journal of Business Valuation and Economic Loss Analysis, 7 (1), 10.1515/1932-9156.1126
DOI: doi:10.1515/1932-9156.1126
EISSN: 1932-9156
Pages: 1 - 22
Type of Material: Journal Article
Journal/Proceeding Title: Journal of Business Valuation and Economic Loss Analysis
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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