Arguing about different things
Critical analysis: the limits of valuation methods and two open disputes
Rolandas Rakštys · lecturer · Vytautas Magnus University, Agriculture Academy · Faculty of Bioeconomy Development, Department of Business and Rural Development · rolandas.rakstys@vdu.lt · ORCID 0000-0003-0299-9930
Chapter 1 “Foundations of Business Value”, section 1.1.5 · English translation of v0.18.0 (2026-11-03) · set v1.0 · 21 slides, ≈ 34 min
Rakštys, R. (2026). Chapter 1. Foundations of Business Value (English translation of v0.18.0, 2026-11-03). Verslo planavimas ir vertinimas [Business planning and evaluation]. Vytautas Magnus University, Agriculture Academy. https://rakstys.eu/studijos/verslo-planavimas-ir-vertinimas/en/skyriai/ch01/ · CC BY-NC-ND 4.0
From ontology to the limits of methods
This section changes the perspective: it examines the limits of valuation methods, compares different approaches and identifies unresolved academic problems.
“The purpose of a critical assessment is not to discredit existing methods but to understand the bounds of their application – when a given approach is appropriate, when it is insufficient, and why.”
- Dispute 1: is DCF enough?
- integrative table
- five open problems
- Dispute 2: state or process?
- recommendations
- calibration
Is DCF enough?
A question about the discounted cash flow method (DCF):
“Is DCF the foundation of valuation to which other methods merely contribute, or one instrument among equals, suited only to businesses of a certain kind?”
On the answer depends whether alternative methods count as a supplement or as a substitute.
Only DCF expresses the definition of value
“value is the present value of future economic flows”
(Fisher, 1930; Williams, 1938)
Other methods lack this connection:
Multiples
import the pricing of other transactions
Asset-based valuation
measures historical outlays
DCF assumptions are visible and open to dispute: they are written into the model and can therefore be tested (Damodaran, 2012). The choice of a multiple permits no such review.
The primacy is conditional
The primacy applies only where the model’s assumptions are satisfied. DCF preserves the central intuition that value must relate to future economic flows, but its limits are “serious and well documented” (Phelan, 1997; Crouzet et al., 2022).
- 1Parameter sensitivityslide 6
- 2Insufficiency of the model
- 3The opacity of intangible capital
- 4The dominance of terminal valueslide 7
2 · Insufficiency of the model
DCF suits the valuation of stable, predictable businesses more naturally than it suits strategic flexibility, synergies or option-like payoffs.
Real options theory was developed to fill precisely this gap, but calibrating it in practice is demanding and depends on modelling choices.
3 · The opacity of intangible capital
Where the drivers of value are data, talent, platform governance or organisational routines, short-term cash flows may be a poor reflection of the real generation of value.
Not an answer but a range
Terminal growth rate
2 % → 3 %
one percentage point
Change in total value when the weighted average cost of capital (WACC) is:
This chapter’s sensitivity table, section 1.2 · Calculate it yourself – in the 1.2 trainer →
No universal magnitude can be stated: the size of the effect is governed by the gap between the discount rate and the growth rate, by the share of terminal value in total value, and by the forecast horizon.
Terminal value itself responds more strongly than total DCF value; where the gap between the discount rate and the growth rate is small, the change may exceed 50 %.
“A DCF result is therefore less an ‘answer’ than a ‘sensitivity range’.”
Most of it is extrapolation
60–80 % of total DCF value consists of terminal value
a practitioners’ rule of thumb, not an empirical law
Terminal value is the value attributed to the period beyond the explicit forecast.
It rests on highly simplified assumptions – constant growth in perpetuity.
“…the greater part of value is essentially an extrapolation rather than a forecast.”
Arguing about different things
“The dispute arises not from conflicting data but from a different question.”
Which method best expresses the concept of value?
DCFWhich method yields the most reliable answer for a particular object?
it depends on the object“Both answers are correct for their own question, which is why the dispute is often left unresolved – the parties are arguing about different things.”
Which limit is firmest?
The epistemic status of the four DCF limits is uneven. Rank the three that the chapter ranks, from the most rigorously to the least well grounded.
Click them in order:
Insufficiency of the model
status not stated in the chapter
so it is left off the scale
The proportions of terminal value dominance depend on the forecast horizon and on growth assumptions, so a general figure is a point of reference here, not a regularity.
Is DCF the first choice here?
What follows for the valuer is not the abandonment of the discounted cash flow method (DCF) but a test of its assumptions before choosing it.
“DCF is irreplaceable as a baseline reference but insufficient as a comprehensive ontology of value.”
What it sees, where it is blind
“Each valuation approach illuminates a particular ontological layer while remaining ‘blind’ to others.” Nine approaches, nine spotlights.
Pluralism – as far as the question is broad
Five ontological layers (section 1.1.2)
“No single method covers all five ontological layers.”
Methodological pluralism – combining several approaches – is therefore not a compromise but a methodologically grounded principle.
An assumption worth naming
The conclusion holds where the particular valuation task really does span all five layers. A narrower question – setting a tariff for regulated infrastructure, say – may be answered within a single layer.
“…pluralism is obligatory only so far as the question itself is broad.”
How is intangible capital to be measured?
Although the theory of business value is a mature field, several fundamental questions remain unresolved.
- 1measuring intangible capital
- 2uncertainty and risk
- 3narratives and behaviour
- 4private and societal value
- 5the temporality of value
How are data, ecosystem position and human capital to be measured reliably and comparably?
Indicators of intangible assets improve valuation, yet such measures remain partial and sensitive to context (Green & Ryan, 2005; Sriram, 2008; Russell, 2016).
Recognition
many intangible assets are not capitalised in the accounts
Boundary
it is unclear whether value belongs to the asset itself or to a complementary system
Depreciation
rates of obsolescence are unstable and specific to context
Transferability
an asset valuable in one environment may be worthless in another
After acquisitions, IFRS 3 requires the transaction premium to be allocated between identifiable intangible assets and goodwill, whose impairment test becomes a subjective act of valuation. Specialised methods – relief from royalty (RRM), multi-period excess earnings (MPEEM) and “with and without” – appear in the case studies of Chapters 13 and 14.
Four more open files
2Uncertainty and risk
The discounted cash flow method (DCF) and the Capital Asset Pricing Model (CAPM) assume that uncertainty can be reduced to risk. In many strategic and technological environments what is met is Knightian uncertainty – the distribution of probabilities is itself unknown or unstable.
More appropriate: scenario analysis, robust control, reasoning in real options (Phelan, 1997; Alfaro et al., 2024).
3Narratives and behaviour
Behavioural finance has documented cognitive biases and the effect of narratives on prices. How should these be integrated formally with strategic and cash-flow-based models?
Shiller’s (2017) narrative economics offers a qualitative perspective; a quantitative synthesis with DCF or multiples remains open.
4Private and societal value
How should private value be related to societal and ecological value where externalities are material? Regulation (the EU taxonomy, the CSRD, the ISSB standards) is formalising the connection,
but academic theory still lacks a unified model that would integrate them without “crushing” either dimension into the other.
5The temporality of value
Does a product designed to fail after two years (planned obsolescence) create more value than a durable product with smaller periodic flows?
The value-lifespan equilibrium is at once an economic, ethical and ecological problem.
State or process?
“Is business value a magnitude that can be fixed at a point in time, or a process of which a snapshot is misleading in principle?”
On the answer depends how long a valuation conclusion is held to remain valid.
The state position
Derived from the assumption of Fisher (1930) and Williams (1938) – the same authors on whom the primacy of DCF rests in the first dispute.
If the flows and the discount rate are defined, value is an unambiguous number, and time enters the model only as the order of discounting. This is how the discounted cash flow method (DCF), multiples and asset-based valuation work: value is a “snapshot”.
The process position
A company’s capabilities and market relations reconfigure themselves continuously: value is “not a noun but a process” – a dynamic “becoming”.
Dynamic capabilities (Teece, 2007): advantage is created not by the set of resources held but by the ability to reconfigure it. Formulas 1.5, 1.6 and 1.8 of the chapter belong to this camp too.
A dispute about an assumption
“Not because of the data – both sides agree on the facts.” The difference lies in the assumptions.
The state view
the structure of the model is fixed, only the parameters are admitted as variable
The process view
the structure itself changes too
“No empirical study will therefore settle the dispute – it concerns what question the model is permitted to ask at all.” The tension remains: this chapter’s apparatus belongs to the process camp, while everyday valuation tools belong to the state camp.
Two regimes and signals of a break
Under Knightian (1921) uncertainty, what changes is not only the values of the parameters but the applicability of the model itself – we no longer know which sets of scenarios to define.
Regime of stable probabilistic assessment
DCF and CAPM work as reliable tools of approximation
Regime of structural uncertainty
what changes is not the parameters but the logic of valuation itself; the earlier risk matrix no longer fits
Signals of a break:
For the manager: not a choice of camp but the recognition of a regime. While the structure of a sector is stable, the state apparatus is appropriate and cheaper; but “the period for which a valuation remains valid must be stated as an assumption rather than inferred from the date on the document”.
A pluralistic toolbox
Baseline tools
DCF
the cash flow “anchor”
Market multiples
the benchmark for market comparison
Necessary supplements
- The logic of real options – for flexibility
- Strategic analysis – for rents and barriers to imitation
- Models of intangible capital – for non-physical assets
- Ecosystem analysis – for platforms and network businesses
- Scenario methods – for deep uncertainty
- ESG integration – for long-horizon risks and opportunities
ESG – environmental, social and governance factors
A rigorous valuation methodology should be pluralistic. This principle is developed in detail in part 1.2 (analytical models and formulas) and applied throughout the book.
There is no judge
“Both disputes discussed in this section remain open, and that is not a defect of exposition.”
Neither is settled by data: the first rests on a different question, the second on a different assumption.
The textbook’s position: DCF is a baseline reference rather than a definition of value; the apparatus is chosen according to the layer in which value resides.
“The position is not neutral – it belongs to the process camp.” The reader has grounds to disagree with it, particularly in valuing stable, predictable businesses.
Dispute 1 – there is something to test: whether the assumptions hold can be assessed before the work begins.
Dispute 2 – there is no test: a regime break is recognised only after the fact, so what remains is “not a method but vigilance”.
Two disputes in one table
| The first dispute | The second dispute | |
|---|---|---|
| Question | Is DCF enough? | State or process? |
| Why the positions differ | a different question | a different assumption |
| Can it be tested? | yes – a test of assumptions before the work | no – a break is recognised only after the fact |
| Practical conclusion | DCF is a baseline reference, not a definition of value | recognising the regime; the period of validity is an assumption |
For discussion · question 1.17. When is a one-dimensional measure of value – a single number – sufficient for taking a decision, and when is it misleading? Formulate a criterion by which a valuer could decide this before starting work.
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Rakštys, R. (2026). Chapter 1. Foundations of Business Value (English translation of v0.18.0, 2026-11-03). Verslo planavimas ir vertinimas [Business planning and evaluation]. Vytautas Magnus University, Agriculture Academy. https://rakstys.eu/studijos/verslo-planavimas-ir-vertinimas/en/skyriai/ch01/ · CC BY-NC-ND 4.0
These slides are based on the textbook Verslo planavimas ir vertinimas [Business Planning and Evaluation]. The text was translated, structured and visually laid out with the help of artificial intelligence tools (Claude), following the protocol for working with AI and the verification procedures set by the author.