Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows
Richard S. Ruback
Harvard Business School
This paper presents the Capital Cash Flow method for valuing risky cash flows. I show that the Capital Cash Flow method is equivalent to discounting Free Cash Flows by the weighted average cost of capital. Because the interest tax shields are included in the cash flows, the Capital Cash Flow approach is easier to apply when the level of debt changes or when a specific amount of debt is projected. The paper also compares the Capital Cash Flow method to the Adjusted Present Value method and provides consistent leverage adjustment formulas for both methods.
Number of Pages in PDF File: 28
JEL Classification: G31, G12
Date posted: June 1, 2000