The paper, “The DCF Valuation Methodology Is Untestable,” equates price and value, which most BVWire—UK readers would question. Nonetheless, the paper’s author, J.B. Heaton (One Hat Research LLC), suggests that the discounted cash flow method works fine for bonds but not for businesses, projects, or stocks because it is untestable.

“While bonds can be viewed as examples of DCF pricing, this depends on their prices often being observable and their ‘expected’ cash flows typically being bounded above by their promised cash flows,” Heaton writes. “For capital projects, businesses, and common stocks, there is simply no way to determine whether a DCF valuation is a good representation of the causal mechanisms behind market values.”