What is a key difference between DCF and comps?

What is a key difference between DCF and comps?

• A. Comps uses internal forecasts;
• B. DCF values based on forecasted cash flows;
• C. DCF is not sensitive to assumptions.
• D. DCF relies on market multiples.

Answer: (B)

Understanding the difference between DCF and comps comes from how each method arrives at value. A DCF valuation is about intrinsic value: you project the business’s future cash flows and then discount them back to the present using a rate that reflects risk and the cost of capital. The result depends on the forecasted cash flows, growth assumptions, capital needs, and the chosen discount rate. In contrast, comps (comparables) derive value from the current market prices of similar companies, applying those market-derived multiples (like EV/EBITDA or P/E) to the target’s metrics. It’s a relative, market-based approach rather than an intrinsic one. So the key difference is that DCF values are based on forecasted cash flows, while comps rely on market multiples from peers. The other statements don’t fit: comps doesn’t use internal forecasts, DCF is highly sensitive to assumptions, and DCF does not rely on market multiples.

Understanding the difference between DCF and comps comes from how each method arrives at value. A DCF valuation is about intrinsic value: you project the business’s future cash flows and then discount them back to the present using a rate that reflects risk and the cost of capital. The result depends on the forecasted cash flows, growth assumptions, capital needs, and the chosen discount rate. In contrast, comps (comparables) derive value from the current market prices of similar companies, applying those market-derived multiples (like EV/EBITDA or P/E) to the target’s metrics. It’s a relative, market-based approach rather than an intrinsic one.

So the key difference is that DCF values are based on forecasted cash flows, while comps rely on market multiples from peers. The other statements don’t fit: comps doesn’t use internal forecasts, DCF is highly sensitive to assumptions, and DCF does not rely on market multiples.