The Mismatching of Apv and the DCF in Brealey, Myers and Allen 8th Edition of Principles of Corporate Finance, 2006

5 Pages Posted: 21 Sep 2006

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: September 23, 2006

Abstract

In the latest edition of Principles of Corporate Finance (Brealey, Myers and Allen, 2006) the authors use a finite cash flow example to illustrate the valuation procedure for using the Discounted Cash Flow (DCF) method with the free cash flow (FCF) and the Adjusted Present Value (APV). The two firm values obtained are different. They say that the "... difference [...] is not a big deal considering all the lurking risks and pitfalls in forecasting [...] cash flows".

In this teaching note we show that the two methods give identical values when the proper discount rates are used.

Keywords: Cash flows, free cash flow, cash flow to equity, valuation, levered value, Adjusted Present Value, APV, Discounted Cash Flow, DCF, weighted average cost of capital, WACC, cost of unlevered equity, tax savings

JEL Classification: M21, M40, M46, M41, G12, G31, J33

Suggested Citation

Velez-Pareja, Ignacio and Tham, Joseph, The Mismatching of Apv and the DCF in Brealey, Myers and Allen 8th Edition of Principles of Corporate Finance, 2006 (September 23, 2006). Available at SSRN: https://ssrn.com/abstract=931805 or http://dx.doi.org/10.2139/ssrn.931805

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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