An Integrated, Consistent Market-Based Framework for Valuing Finite Cash Flows

Management Research News, Vol. 28, No. 10, pp. 65-92

23 Pages Posted: 2 Feb 2005 Last revised: 1 Apr 2009

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: January 1, 2005

Abstract

In this teaching note, we present an integrated, consistent market-based framework for valuing finite cash flows. We derive the relevant cash flows from integrated financial statements, and based on Modigliani and Miller's (M & M) theories, we estimate the appropriate cost of capital and value the cash flows in seven different ways. The first five methods are variations of the Discounted Cash Flow (DCF) method.

The last two methods, the RIM and EVA, are interesting because they differ from the DCF methods. In particular, they apply a charge for equity (based on the book value of equity) to the net income or a charge for invested capital (based on the book value of invested capital) to the Net Operating Profit after tax (NOPLAT), roughly speaking. Happily, the results from the DCF methods are fully consistent with the RIM and EVA.

Since the results from the seven methods must always match, calculating the (present) values with the seven methods is a powerful check on the consistency of the valuation exercise. With the availability of computing resources, it is easy to implement the seven methods on a routine basis.

In Principles of Cash Flow Valuation, 2004, Academic Press we present and explain the valuation methods in detail.

Keywords: Multiperiod WACC, firm valuation, levered equity, valuation with EVA, cost of equity

JEL Classification: D61, G31, H43

Suggested Citation

Tham, Joseph and Velez-Pareja, Ignacio, An Integrated, Consistent Market-Based Framework for Valuing Finite Cash Flows (January 1, 2005). Management Research News, Vol. 28, No. 10, pp. 65-92. Available at SSRN: https://ssrn.com/abstract=648301

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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