Modeling Cash Flows with Constant Leverage: A Note (in Spanish)

9 Pages Posted: 12 Jul 2005

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

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

Date Written: June 28, 2005

Abstract

It is widely known that if the leverage is constant over time, then the cost of equity and the Weighted Average Cost of Capital (WACC) for the free cash flow, FCF, is constant over time. In other words, it is inappropriate to use a constant WACCFCF to discount the free cash flow (FCF) if the leverage changes over time. However, it is common to find analysts who inconsistently use a constant WACCFCF even if the leverage is not constant.

In this teaching note, we use a simple numerical example to illustrate how to model cash flows that are consistent with constant leverage. We verify the consistency of the example with two basic principles: conservation of cash flows and conservation of values.

Note: Downloadable document is in Spanish.

Keywords: WACC, constant leverage, cash flows

JEL Classification: D61, G31, H43

Suggested Citation

Velez-Pareja, Ignacio and Tham, Joseph, Modeling Cash Flows with Constant Leverage: A Note (in Spanish) (June 28, 2005). Available at SSRN: https://ssrn.com/abstract=754464 or http://dx.doi.org/10.2139/ssrn.754464

Ignacio Velez-Pareja (Contact Author)

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

Joseph Tham

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)

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