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Valuation: Measuring and Managing the Value of Companies, Sixth Edition
Chapter 33 Cyclical Companies
Solutions
1. The volatility of DCF is much lower than that of the profits. This difference arises because the DCF is
a sum of values, which may be potentially infinite, and it will vary only slightly as one received cash
2. Analysts’ projections of the profits of cyclical companies tend not to be accurate. Analysts are either
unable or unwilling to predict the cycles for these companies. In particular, analysts tend not to
3. In reality, analysts and investors will never have perfect foresight. At any point, the company may be
either continuing its old cycle or breaking into a new cycle. The scenario approach places
4. The three potential reasons are (1) cash is generally more available when prices are high, (2) it is
easier to get approval from boards of directors for investments when profits are high, and
(3) executives get concerned about the possibilities of rivals growing faster than their firms.
Companies should not invest based on cycles but based on the availability of positive-NPV projects.
5. The four steps are: (1) construct and value the normal-cycle scenario; (2) construct and value a new
