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Consistent Valuation Cash Flow

21 Pages Posted: 18 Mar 2012 Last revised: 18 Mar 2016

Uzi Yaari

Rutgers University; School of Business-Camden

Andrei L. Nikiforov

Rutgers University

Emel Kahya

Rutgers, The State University of New Jersey - Accounting

Yochanan Shachmurove

City University of New York, CUNY City College of New York - Department of Economics; The University of Pennsylvania - Department of Economics

Date Written: April 4, 2012

Abstract

This paper seeks to draw attention to a flaw in the firm’s Free Cash Flow model and related statement widely accepted in Corporate Finance. We argue that the common offset of any Current Liabilities against Current Assets distorts the FCF size, composition, and volatility, thereby misstating the firm or project size, debt and assets composition, financial leverage, risk profile, and estimated value. We demonstrate empirically that the offset opens opportunities to manipulate the FCF by systematically overstating its size and understating its volatility. We propose to avoid any offset and rename the standardized statement "Valuation Cash Flow" (VCF).

Keywords: Financial Reporting, Free Cash Flow, Net Working Capital, Cost of Capital, Corporate Valuation, Project Valuation

JEL Classification: G30, G31, G32, G35, G38, H32, K22, L21, M14, M40, M41

Suggested Citation

Yaari, Uzi and Nikiforov, Andrei L. and Kahya, Emel and Shachmurove, Yochanan, Consistent Valuation Cash Flow (April 4, 2012). PIER Working Paper No. 12-009. Available at SSRN: https://ssrn.com/abstract=2024956 or http://dx.doi.org/10.2139/ssrn.2024956

Uzi Yaari

Rutgers University ( email )

School of Business
Camden, NJ 08102
United States
610-664-2086 (Phone)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

School of Business-Camden ( email )

Rutgers University
227 Penn Street
Camden, NJ 08102
United States
610-664-2086 (Phone)
610-664-2198 (Fax)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

Andrei L. Nikiforov

Rutgers University ( email )

Camden, NJ 08102
United States
856-225-6594 (Phone)

Emel Kahya

Rutgers, The State University of New Jersey - Accounting ( email )

Camden, NJ 08102
United States
609-225-6594 (Phone)
609-225-6632 (Fax)

Yochanan Shachmurove (Contact Author)

City University of New York, CUNY City College of New York - Department of Economics ( email )

160 Convent Avenue
New York, NY 10031
United States
212-650-6202 (Phone)

The University of Pennsylvania - Department of Economics ( email )

160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
United States
215-898-1090 (Phone)
215-573-2057 (Fax)

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