While DCF models are adaptable and flexible, they are designed to value going concerns, and the risks of being a going concern. Thus, if you are worried about truncation risk, i.e, survival risk for a young company, failure risk for a distressed company or nationalization risk if a government changes, you cannot bring that type of risk easily into a DCF. In this session, I look at this question, using Aramco as my lab experiment, starting with my DCF value (from a prior session) of $1.65 trillion, and then bringing in the risk that the House of Saud may fall and that your Aramco equity stake may go with it. I then use this approach to ask the question: Is a business more valuable in a democracy or an autocracy, holding operating details the same. Slides:
Blog Post:
Valuation of Aramco:
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