Transversality and the Stochastic Nature of Cash Flows - Modern Economy

ME > Vol.6 No.6, June 2015

Modern Economy

Volume 6, Issue 6 (June 2015)

ISSN Print: 2152-7245 ISSN Online: 2152-7261

Google-based Impact Factor: 0.74 Citations h5-index & Ranking

Transversality and the Stochastic Nature of Cash Flows ()

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DOI: 10.4236/me.2015.66072 2,891 Downloads 3,801 Views Citations

Author(s)

Lutz Kruschwitz, Andreas Löffler

Affiliation(s)

Department of Finance, Accounting, and Taxation, School of Business and Economics, Freie Universitat Berlin, Berlin, Germany.

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.

KEYWORDS

Business Valuation, Stochastic Cashflows, Infinite Lifespan, Transversality

Share and Cite:

Kruschwitz, L. and Löffler, A. (2015) Transversality and the Stochastic Nature of Cash Flows. Modern Economy, 6, 755-769. doi: 10.4236/me.2015.66072.

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