Top 9 (Unnecessary and Avoidable) Mistakes in Cash Flow Valuation

16 Pages Posted: 19 Feb 2004 Last revised: 2 Apr 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: March 31, 2019

Abstract

In cash flow valuation (CFV), there are two main categories of mistakes: derivation of the appropriate cash flows and estimation of the cost of capital. A simple-minded view of the world would suggest that with near perfect capital markets, the presence of arbitrage would severely punish wrong valuations and eradicate such mistakes in the derivations of cash flows and estimations of the cost of capital. Nonetheless, to the dismay of academics, such mistakes continue to exist and thrive. It is not clear why such mistakes persist in practice.

In this paper we present our list of the top nine mistakes in cash flow valuation. In the age of the computer these mistakes are both unnecessary and avoidable. In the usual triumph of hope over experience, we are attempting to persuade analysts that they would benefit from paying attention to these mistakes. Ultimately, the (un)importance of the mistakes is an empirical question and depends on the considered judgment of practitioners.

Keywords: Cost of capital, WACC, valuation

JEL Classification: G12, D61, G29, G31, H43

Suggested Citation

Tham, Joseph and Velez-Pareja, Ignacio, Top 9 (Unnecessary and Avoidable) Mistakes in Cash Flow Valuation (March 31, 2019). Available at SSRN: https://ssrn.com/abstract=496083 or http://dx.doi.org/10.2139/ssrn.496083

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

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