Transversality and the Stochastic Nature of Cash Flows


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.

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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.

Conflicts of Interest

The authors declare no conflicts of interest.


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