The assumption of stable earnings can significantly impact business valuation:
1. Overvaluation Risk: Assuming stable earnings may lead to overvaluation, making it difficult to meet investor expectations. 2. Discounted Cash Flow (DCF): For DCF valuations, stable earnings result in predictable cash flows, but if earnings are volatile, the risk-adjusted discount rate should be higher. 3. Investment Decisions: Investors may demand higher returns for ventures with uncertain earnings, affecting the cost of capital for the business.