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The Valuation of Cash Flow Forecasts: An Empirical Analysis

JOURNAL OF FINANCE, Vol 50 No 4, September 1995

Posted: 18 Aug 1995  

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Richard S. Ruback

Harvard Business School

Multiple version iconThere are 3 versions of this paper

Abstract

This paper compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. For our sample of 51 HLTs completed between 1983 and 1989, the valuations of discounted cash flow forecasts are within 10%, on average, of the market values of the completed transactions. Our valuations perform at least as well as valuation methods using comparable companies and transactions. We also invertour analysis by estimating the risk premia implied by transaction values and forecast cash flows, and relating those risk premia to firm and industry betas, firm size, and firm book-to-market ratios.

JEL Classification: G32

Suggested Citation

Kaplan, Steven N. and Ruback, Richard S., The Valuation of Cash Flow Forecasts: An Empirical Analysis. JOURNAL OF FINANCE, Vol 50 No 4, September 1995. Available at SSRN: https://ssrn.com/abstract=6609

Steven Neil Kaplan (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4513 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Richard S. Ruback

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6422 (Phone)
617-496-8443 (Fax)

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