Stock Prices and DCF valuation – Evidence from China

Abstract

The DCF model is a valuation model that we often use in our daily life. It is a common model for company valuation. Although the DCF model is the best choice of most companies' valuation models, there are still many inaccuracies in this valuation compared with the actual value. To verify the accuracy of the DCF model, this paper bases it on the real free cash flow, comparing and analysing the DCF valuation and stock prices. We found a) the results of the DCF model are not the same as the actual stock price at the end of 2005; b) the DCF valuation results are significantly higher than the actual stock price; c) the degree of deviation is different from various industries. The deviation may be caused by the reform of non-tradable shares in 2005.