Discounted Cash Flow Valuation Methods: Examples of Perpetuities, Constant Growth and General Case

20 Pages Posted: 14 Jun 2005 Last revised: 18 Nov 2015

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: November 17, 2015

Abstract

This paper explores the discounted cash flow valuation methods. We start the paper with the simplest case: no-growth, perpetual-life companies. Then we will study the continuous growth case and, finally, the general case.

The different concepts of cash flow used in company valuation are defined: equity cash flow (ECF), free cash flow (FCF), and capital cash flow (CCF). Then the appropriate discount rate is determined for each cash flow depending on the valuation method used.

Our starting point will be the principle by which the value of a company's equity is the same, whichever of the four traditional discounted cash flow formulae is used. This is logical: given the same expected cash flows, it would not be reasonable for the equity's value to depend on the valuation method.

Keywords: discounted cash flow valuation, cash flow valuation, value of tax shields, required return to equity

JEL Classification: G12, G31, G32

Suggested Citation

Fernandez, Pablo, Discounted Cash Flow Valuation Methods: Examples of Perpetuities, Constant Growth and General Case (November 17, 2015). Available at SSRN: https://ssrn.com/abstract=743229 or http://dx.doi.org/10.2139/ssrn.743229

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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