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The research of the use of DCF method for determining target share prices of Russian public corporations


Anton Yu. Zhabunin, Natalia V. Ievleva, Irina A. Cherednichenko, Alla V. Sokolova
(about the authors)

Zhabunin Anton Yu. – Candidate of Science, Economics, Associate Professor of the Chair of Economics and Management (Volzhsky Polytechnic Institute (branch) of Volgograd State Technical University, Volzhsky)

Ievleva Natalia V. – Candidate of Science, Economics, Associate Professor of the Chair of Economics and Management (Volzhsky Polytechnic Institute (branch) of Volgograd State Technical University, Volzhsky)

Cherednichenko Irina A. – Candidate of Science, Philosophy, Associate Professor; Associate Professor of the Chair of Economics and Management (Volzhsky Polytechnic Institute (branch) of Volgograd State Technical University, Volzhsky)

Sokolova Alla V. – Senior Lecturer of the Chair of Economics and Management (Volzhsky Polytechnic Institute (branch) of Volgograd State Technical University, Volzhsky)

Published in:
Russian Journal of Entrepreneurship
– Volume 17, Number 24 (December 2016)

JEL classification: E22, G12, G17

Keywords: cash flow discounting method (DCF), Gordon model, growth rates, investments, residual (terminal) value, target prices of shares of a public corporation, weighed average capital cost (WACC)


Citation:
Anton Yu. Zhabunin, Natalia V. Ievleva, Irina A. Cherednichenko, Alla V. Sokolova (2016). The research of the use of DCF method for determining target share prices of Russian public corporations. Russian Journal of Entrepreneurship, 17(24), 3643–3656. doi: 10.18334/rp.17.24.37205


Share:

Abstract:

In the article, it has been shown that the use of DCF method by financial analysts for the appraisal of shares of Russian public corporations (evidence from PAO "Lukoil") provides unsatisfactory results in terms of price forecast reliability. The authors have identified a circle of problems to solve for making possible an analysis of the causes of errors in forecasts. The influence of such factors as the forecast of free cash flow, appraisal of weighed average capital cost and the residual value on the price forecast precision has been studied. The authors reveal the flaws of the traditionally used Gordon model for calculating the residual value and substantiate propositions for its adjustment. The research results may be of interest for financial analysts, financial executives of public companies, as well as for private and institutional investors.







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