The Valuation of Cash Flow Forecasts: An Empirical Analysis

44 Pages Posted: 11 Jun 2000

See all articles by Steven N. Kaplan

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Richard S. Ruback

Harvard Business School

Multiple version iconThere are 3 versions of this paper

Date Written: April 1994

Abstract

This paper compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. These forecasts are provided by management to investors and shareholders in 51 HLTs completed between 1983 and 1989. Our estimates of discounted cash flows are within 10%, on average, of the market values of the completed transactions. Our estimates perform at least as well as valuation methods using comparable companies and transactions. We also invert our analysis and estimate the risk premium implied by transaction values and forecast cash flows, and the relation of the implied risk premium to firm-level betas, industry-level betas, firm size, and firm book-to-market ratios.

Suggested Citation

Kaplan, Steven Neil and Ruback, Richard S., The Valuation of Cash Flow Forecasts: An Empirical Analysis (April 1994). NBER Working Paper No. w4724. Available at SSRN: https://ssrn.com/abstract=226993

Steven Neil Kaplan (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Richard S. Ruback

Harvard Business School ( email )

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United States
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617-496-8443 (Fax)

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