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Transversality and the Stochastic Nature of Cash Flows
Department of Finance, Accounting, and Taxation, School of Business and Economics, Freie Universitat Berlin, Berlin, Germany
Department of Finance, Accounting, and Taxation, School of Business and Economics, Freie Universitat Berlin, Berlin, Germany
- 1 Department of Finance, Accounting, and Taxation, School of Business and Economics, Freie Universitat Berlin, Berlin, Germany
- 2 Department of Finance, Accounting, and Taxation, School of Business and Economics, Freie Universitat Berlin, Berlin, Germany
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Abstract
We show that a transversality condition is necessary when it comes to valuing a company with an infinite lifespan. Without transversality the firm value cannot be uniquely determined. Also, an assumption on a lower bound of cash flows is necessary to achieve the desired result. We discuss four different stochastic cash flow processes and analyze to what extent the processes associated with these enterprise values satisfy the transversality condition.
KeywordsBusiness ValuationStochastic CashflowsInfinite LifespanTransversality
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