Valuing Companies by Cash Flow Discounting: Ten Methods and Nine Theories
University of Navarra - IESE Business School
November 17, 2015
EFMA 2002 London Meetings
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.
Note: Previoulsy Titled: Valuing Companies by Cash Flow Discounting: Eight Methods and Six Theories
Number of Pages in PDF File: 16
Keywords: discounted cash flows, APV, WACC, Equity Cash Flow, beta
JEL Classification: G12, G31, M21
Date posted: May 14, 2004 ; Last revised: November 18, 2015