TITLE:
Transversality and the Stochastic Nature of Cash Flows
AUTHORS:
Lutz Kruschwitz, Andreas Löffler
KEYWORDS:
Business Valuation, Stochastic Cashflows, Infinite Lifespan, Transversality
JOURNAL NAME:
Modern Economy,
Vol.6 No.6,
June
26,
2015
ABSTRACT: 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.