What is typically assessed when considering cash flow assumptions in DCF?

When considering cash flow assumptions in a Discounted Cash Flow (DCF) analysis, projected revenue growth and expense trends are crucial components. This assessment is fundamental because the DCF model relies heavily on estimating future cash flows that the business is expected to generate. Revenue growth projections stem from anticipated market opportunities, demand for products or services, and overall economic conditions.

Expense trends are equally important as they determine how efficiently a company can operate and maintain its profitability. Accurate forecasting of both revenues and expenses allows for a realistic depiction of future cash flows. This, in turn, influences the overall valuation calculated through the DCF approach. Establishing reliable cash flow projections is essential as these figures directly affect the discounting process, ultimately impacting the investment's perceived worth.

While aspects like market volatility, historical valuations, and past performance of similar investments might provide context or influence assumptions, they do not directly contribute to the cash flow projections as the projected revenue growth and expense trends do. Thus, focusing on the latter provides the most direct link to obtaining accurate and justifiable cash flow assumptions.