Matching Methods in Valuation with Finite Cash Flows: An Almost Perfect Textbook Example

7 Pages Posted: 3 May 2019

See all articles by Joseph Tham

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy; Academy of Public Administration under the President of the Republic of Kazakhstan

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: April 7, 2019

Abstract

In this note, we extend a numerical example in the textbook by Berk & DeMarzo that matches methods for only when KTS is equal to KD. We show that there is a generalized formulation for the return to levered equity KE that works for any value of KTS, the appropriate discount rate for the tax shield. We debunk the view that the CFE (Cash Flow to Equity) method is “apparently simple but practically confusing and useless.” Due diligence in professional valuation demands that we practice triangulation as Standard Operating Procedure (SOP). This formula is irrelevant for anyone who believes in the Pablo Fernandez (PF) approach to valuation because the concept of a “discount rate for the tax shield” is obviously nonsensical and almost surely absurd.

Note: Upon request, the authors would be delighted to send you an accompanying spreadsheet.

Keywords: Weighted Average Cost of Capital (WACC), Free Cash Flow (FCF), Tax Shield

JEL Classification: D61, H43, M21, M40, M46, G12, G31, G33

Suggested Citation

Tham, Joseph and Velez-Pareja, Ignacio, Matching Methods in Valuation with Finite Cash Flows: An Almost Perfect Textbook Example (April 7, 2019). Available at SSRN: https://ssrn.com/abstract=3367928 or http://dx.doi.org/10.2139/ssrn.3367928

Joseph Tham (Contact Author)

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

Academy of Public Administration under the President of the Republic of Kazakhstan ( email )

Abay Street, 33a
Astana
Kazakhstan
+7 8 7172753422 (Phone)

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

Register to save articles to
your library

Register

Paper statistics

Downloads
18
Abstract Views
115
PlumX Metrics