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

16 Pages Posted: 14 May 2004 Last revised: 18 Nov 2015

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: November 17, 2015

Abstract

This paper shows 10 valuation methods based on equity cash flow; free cash flow; capital cash flow; APV (Adjusted Present Value); business’s risk-adjusted free cash flow and equity cash flow; risk-free rate-adjusted free cash flow and equity cash flow; economic profit; and EVA.

All 10 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 or parameters 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, lists the most important assumptions and valuation equations according to each of these theories, and provides an example in which the VTS of a company with debt of 1,500 goes from zero to 745.

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

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

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo, Valuing Companies by Cash Flow Discounting: Ten Methods and Nine Theories (November 17, 2015). EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=256987

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

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