Unformatted text preview: g discounted cash flows. It illustrates ten methods: free cash flow; equity cash flow; capital
cash flow; APV (adjusted present value); business’s risk-adjusted free cash flow and equity cash
flow; risk-free rate-adjusted free cash flow and equity cash flow; economic profit; and EVA.
All ten methods always give the same value. This result is logical, as all the methods analyze the
same reality under the same hypotheses; they differ only in the cash flows taken as the starting
point for the valuation.
The differences between the various theories of firm valuation arise from the calculation of the
value of the tax shields (VTS). The paper illustrates and analyses nine different theories of the
calculation of the VTS, and lists the most important valuation equations according to each of
these theories. * Professor, Financial Management, PricewaterhouseCoopers Chair of Finance, IESE JEL Classification: G12, G31, M21 Keywords: Discounted Cash Flows, APV, WACC, Equity Cash Flow. IESE Business School-University of Navarra VALUING COMPANIES BY CASH FLOW DISCOUNTING:
TEN METHODS AND NINE THEORIES* This paper is a summarized compendium of all the methods and theories on company valuation
using discounted cash flows.
Section 1 shows the ten most commonly used methods for valuing companies by discounted
1) Free cash flow discounted at the WACC;
2) Equity cash flows discounted at the required return on equity;
3) Capital cash flows discounted at the WACC before tax;
4) APV (adjusted present value);
5) The business’s risk-adjusted free cash flows discounted at the required return on assets;
6) The business’s risk-adjusted equity cash flows discounted at the required return on
7) Economic profit discounted at the required return on equity;
8) EVA discounted at the WACC;
9) The risk-free rate-adjusted free cash flows discounted at the risk-free rate; and
10) The risk-free rate-adjusted equity cash flows discounted at the required return on assets.
All ten methods...
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