Discounted Cash Flow and Residual Earnings Valuation: A Comparison in the Context of Valuation Disputes

Using actual data from a disputed acquisition, this article presents a comparison of two related income approaches to valuation—discounted cash flow (DCF) and residual earnings (RE). Although the DCF approach remains predominant in practice, the data and analysis presented here indicate that the RE approach is often a better choice, particularly in the context of disputes and litigation. The RE approach is more anchored in observable data, is less sensitive to parameters that can be subject to discretionary adjustment, and is more economically transparent.