Two Fundamental Principles for Cash Flow Valuation (CFV)

Abstract

In this note, we discuss two fundamental principles for Cash Flow Valuation (CFV). We hope that adherence to these two principles will improve the practice of CFV. These principles are general, relatively uncontroversial, and should be acceptable as starting points for cash flow valuation. Principle One is on the conservation of cash flows. Principle Two is on the conservation of the (present) values that correspond to the cash flows in Principle One. We illustrate the application of these two principles with a simple numerical example.

Keywords: Financial modeling, Valuation, Weighted Average Cost of Capital (WACC), Free Cash Flow (FCF)

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