Valuing Companies by Cash Flow Discounting: Ten Methods and Nine Theories

Abstract:     
This paper is a summarized compendium of all the methods and theories on company valuation using discounted cash flows. It shows ten discounted cash flow valuation methods:
1) free cash flow discounted at the WACC;
2) equity cash flows discounted at the required return to equity;
3) capital cash flows discounted at the WACC before tax;
4) APV (Adjusted Present Value);
5) the business's risk-adjusted free cash flows discounted at the required return to assets;
6) the business's risk-adjusted equity cash flows discounted at the required return to assets;
7) economic profit discounted at the required return to equity;
8) EVA discounted at the WACC;
9) the risk-free rate-adjusted free cash flows discounted at the risk-free rate; and
10) the risk-free rate-adjusted equity cash flows discounted at the required return to assets.
All ten methods always give the same value. This result is logical, as all the methods analyze the same reality under the same hypotheses; they differ only in the cash flows taken as the starting point for the valuation.
The disagreements among the various theories of firm valuation arise from the calculation of the value of the tax shields (VTS). The paper shows and analyses 9 different theories on the calculation of the VTS: No-cost-of-leverage, Modigliani and Miller (1963), Myers (1974), Miller (1977), Miles and Ezzell (1980), Harris and Pringle (1985), Damodaran (1994), With-cost-of-leverage, and Practitioners method.
The paper lists the most important valuation equations according to each of these theories, and also shows how the valuation equations change when the debt's market value is not equal to its book value.

Note: Previoulsy Titled: Valuing Companies by Cash Flow Discounting: Eight Methods and Six Theories

Keywords: discounted cash flows, APV, WACC, Equity Cash Flow, beta

JEL Classifications: G12, G31, M21

Accepted Paper Series