Equivalence of Ten Different Methods for Valuing Companies by Cash Flow Discounting

25 Pages Posted: 6 May 2004 Last revised: 19 Oct 2008

See all articles by Pablo Fernandez

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: October 11, 2003

Abstract

This paper shows that ten methods on company valuation using cash flow discounting (WACC; equity cash flow; capital cash flow; adjusted present value; residual income; EVA; business's risk-adjusted equity cash flow; business's risk-adjusted free cash flow; risk-free-adjusted equity cash flow; and risk-free-adjusted free cash flow) always give the same value when identical assumptions are used. This result is logical, since all the methods analyze the same reality based upon the same assumptions; they only differ in the cash flows taken as the starting point for the valuation. We present all ten methods allowing the required return to debt being different from the cost of debt. Seven methods require an iterative process. Only APV and the business risk-adjusted cash flows methods do not require iteration.

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo, Equivalence of Ten Different Methods for Valuing Companies by Cash Flow Discounting (October 11, 2003). EFMA 2004 Basel Meetings Paper. Available at SSRN: https://ssrn.com/abstract=367161 or http://dx.doi.org/10.2139/ssrn.367161

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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