This is the key benefit of a discounted cash flow approach to valuation. Having thought through a couple of possible scenarios for Biomet, we now know exactly what assumptions are incorporated in our estimated intrinsic value of $30 per share. Armed with that knowledge, we can make a more informed investment decision—we wouldn’t know as much about the assumptions needed to believe that the stock is reasonably valued if we’d just looked at the current P/E relative to the historical average P/E.
