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
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: Suggested Citation
Register to save articles to
your library
Recommended Papers
-
Modeling Cash Flows with Constant Leverage: A Note
By Ignacio Velez-pareja and Joseph Tham
-
Modeling Cash Flows with Constant Leverage: A Note (in Spanish)
By Ignacio Velez-pareja and Joseph Tham
-
Applicability of the Classic WACC Concept in Practice
By M. A. Mian and Ignacio Velez-pareja
-
Constant Leverage and Constant Cost of Capital: A Common Knowledge Half-Truth
By Ignacio Velez-pareja, Rauf Ibragimov, ...
-
Consistency in Chocolate. A Fresh Look at Copeland's Hershey Foods & Co Case
By Ignacio Velez-pareja and Joseph Tham
-
Valuation of Cash Flows with Constant Leverage: Further Insights
By Ignacio Velez-pareja and Joseph Tham
