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

Anton Yu. Zhabunin1, Natalia V. Ievleva1, Irina A. Cherednichenko1, Alla V. Sokolova1
1 Волжский политехнический институт (филиал) Волгоградского государственного технического университета, г. Волжский

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Journal paper

Russian Journal of Entrepreneurship *
Volume 17, Number 24 (December 2016)
* Этот журнал не выпускается в Первом экономическом издательстве

Citation:

Zhabunin, A. Y., Ievleva, N. V., Cherednichenko, I. A., & Sokolova, A. V. (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. https://doi.org/10.18334/rp.17.24.37205

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.

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

JEL-classification: E22, G12, G17

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