This thesis explores the efficacy of the discounted cash flow model and empirically analyzes the methodology’s ability to predict equity prices one year from implementation. The sample of equities accurately represents the NYSE’s Pharmaceutical and Biotechnology subsectors of Healthcare. Model back testing from CY2008 is necessary to match valuation with actual equity prices. The data subsequently applies identical inputs from CY2008 to CY2009 historical figures to evaluate the DCF’s ability to forecast CY2010 year-end actual stock prices. Furthermore, the study attempts to structurally alter the standard DCF in order to augment the model’s ability to accurately estimate Biotechnology equity prices. The thesis’ prognostic results from sample (Pharmaceutical and Biotechnology) equity back tests sufficiently assesses valuation discrepancies and determines the DCF’s effectiveness across subsectors of the drug industry.
