Stochastic Discounted Cash Flow

This open-access textbook is the second, updated and extended edition of a comprehensive treatment of firm valuation based on discounted cash flow (DCF) analysis. While DCF is the standard framework for valuing firms, it encompasses several approaches, including the entity and equity approaches, as well as concepts such as adjusted present value (APV) and the weighted average cost of capital (WACC). This book develops these methods within a unified asset-pricing framework and explains their underlying assumptions, relationships, and fields of application. The book combines the practitioner-oriented concept of the cost of capital with modern no-arbitrage asset pricing. It presents the theoretical foundations of DCF valuation, analyzes the effects of financing and taxation, and discusses the circumstances under which alternative valuation methods are equivalent and when they are not. Throughout, the emphasis is on developing a rigorous yet accessible understanding of firm valuation. The book is intended for undergraduate and graduate students of economics, particularly those specializing in finance, as well as researchers, professionals, and practitioners working in corporate finance, valuation, and related fields.