Why is it important to clearly state assumptions underlying a valuation?

Question

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The Answer is The credibility of any valuation ultimately depends on the validity of its underlying assumptions. Valuation-related assumptions tend to fall into five major categories: (1) market, (2) income statement, (3) balance sheet, (4) synergy, and (5) valuation. Note that implicit assumptions about cash flow are already included in assumptions made about the income statement and changes in the balance sheet, which together drive changes in cash flow. Market assumptions are generally those that relate to the growth rate of unit volume and product price per unit. Income statement assumptions include the projected growth in revenue, the implied market share, and the growth in the major components of cost in relation to sales. Balance sheet assumptions may include the growth in the primary components of working capital and fixed assets in relation to the projected growth in sales. Synergy assumptions relate to the amount and timing associated with each type of anticipated synergy, including cost savings from workforce reductions, productivity improvements due to the introduction of new technologies or processes, and revenue growth because of increased market penetration. Finally, examples of important valuation assumptions include the acquiring firm's target debt to equity ratio used in calculating the cost of capital, the discount rates used during the forecast and stable growth periods, and the growth assumptions used in determining the terminal value.

Why Is It Important to Clearly State Assumptions Underlying a Valuation