What are the main weaknesses of a DCF analysis?

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IBPrep · Accepted Answer

(1) Terminal value typically drives 60-80%+ of total value, highly sensitive to growth and discount-rate assumptions; (2) CapEx projections often assume maintenance levels only, missing future growth investments; (3) Built entirely on assumptions about discount rate, growth, margins, small input changes cascade to big valuation swings; (4) Inappropriate for balance-sheet-driven businesses (banks, REITs); (5) Doesn't work for cyclical businesses or companies with negative FCF; (6) Doesn't capture optionality (abandonment options, expansion options), better handled by real options analysis.

What are the main weaknesses of a DCF analysis?

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What are the main weaknesses