Why should DCF models be regularly updated?

The correct answer highlights the importance of keeping a DCF model current by ensuring that it reflects current market conditions. DCF models rely heavily on inputs and assumptions like revenue growth rates, discount rates, and capital expenditures. These factors can change due to shifts in market dynamics, economic conditions, or changes in the competitive landscape.

Regularly updating a DCF model ensures that the valuation is based on the most accurate and relevant information, allowing for better investment decisions and financial planning. It also helps account for unforeseen events that may impact future cash flows, thus providing a more reliable assessment of a company’s intrinsic value.

In contrast, maintaining the same valuation regardless of data would undermine the model’s reliability. Decreasing operational risks is a more indirect benefit and not the primary purpose of updating DCF models. While eliminating past assumptions might align with the idea of updating the model, the goal is more about adjusting to reflect the most recent and accurate conditions rather than simply erasing what was previously thought.