The Valuation of Cash Flow Forecasts: An Empirical Analysis
Steven N. Kaplan
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Richard S. Ruback
Harvard Business School
JOURNAL OF FINANCE, Vol 50 No 4, September 1995
This paper compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. For our sample of 51 HLTs completed between 1983 and 1989, the valuations of discounted cash flow forecasts are within 10%, on average, of the market values of the completed transactions. Our valuations perform at least as well as valuation methods using comparable companies and transactions. We also invertour analysis by estimating the risk premia implied by transaction values and forecast cash flows, and relating those risk premia to firm and industry betas, firm size, and firm book-to-market ratios.
JEL Classification: G32
Date posted: August 18, 1995
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