Articles, DCF - Capex, Depreciation & Amortization, Valuation

Delaware’s Unwarranted Assumption That Capex Should Equal Depreciation in a DCF Model

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By Gilbert E. Matthews, CFA, and Arthur H. Rosenbloom

Every valuator’s kit bag includes income-based approaches such as discounted cash flow or the direct capitalization of earnings by which to determine fair value or value using other standards.

Delaware fair value proceedings have predominantly adopted the erroneous assumption that capital expenditures should equal the sum of depreciation and amortization in determining terminal value. The assumption makes sense only if one assumes the non-real-world scenario of both no growth and no inflation, as we demonstrate in more detailed fashion in the next section of this article.

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