Consistency in Valuation: A Practical Guide

Academia, Revista Latinoamericana de Administración, No. 44, May, 2010

23 Pages Posted: 11 Oct 2006 Last revised: 8 Feb 2012

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Antonio Burbano-Perez

Universidad de los Andes - Business School

Date Written: May 23, 2008

Abstract

Practitioners and teachers very easily break some consistency rules when doing or teaching valuation of assets. In this short and simple note we present a practical guide to call the attention upon the most frequent broken consistency rules. They have to do firstly with the consistency in the matching of the cash flows, this is, the free cash flow (FCF), the cash flow to debt (CFD), the cash flow to equity (CFE), the capital cash flow (CCF) and the tax savings or tax shield (TS). Secondly, they have to do with the proper expression for the cost of levered equity, Ke and different formulations for the weighted average cost of capital, WACC, with finite cash flows and perpetuities. And finally, they have to do with the consistency between the terminal value and growth for the FCF and the terminal value and growth for the CFE. We illustrate the consistency using a simple example. In the Appendix we show some algebraic derivations

Keywords: Cash flows, free cash flow, cash flow to equity, valuation, levered value, levered equity value, terminal value, cost of levered equity, cost of unlevered equity

JEL Classification: M21, M41, G12, G31

Suggested Citation

Velez-Pareja, Ignacio and Burbano-Perez, Antonio, Consistency in Valuation: A Practical Guide (May 23, 2008). Academia, Revista Latinoamericana de Administración, No. 44, May, 2010 . Available at SSRN: https://ssrn.com/abstract=758664

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

Antonio Burbano-Perez

Universidad de los Andes - Business School ( email )

Calle 18 Cra 1
Bogota
Colombia
+571 3394949 (Phone)

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