What could be a consequence of overestimating cash flows in a DCF analysis?

Overestimating cash flows in a DCF analysis can lead to inflated company valuations. This inflation occurs because cash flows are a critical input in determining the present value of a business. When projections are overly optimistic, the resulting valuation will be higher than warranted, potentially misleading investors and stakeholders about the true financial health and performance of the company.

An inflated valuation can have several negative consequences, such as leading to poor investment decisions and unrealistic expectations for growth, which can ultimately result in a loss of confidence and investment if the actual performance does not meet those inflated projections. Therefore, accurate forecasting is essential for creating reliable valuations and making informed financial decisions.