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di-0451-e - Working Paper WP no 451 January 2002 CIIF Rev...

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VALUING COMPANIES BY CASH FLOW DISCOUNTING: TEN METHODS AND NINE THEORIES Pablo Fernández IESE Business School – University of Navarra Avda. Pearson, 21 – 08034 Barcelona, Spain. Tel.: (+34) 93 253 42 00 Fax: (+34) 93 253 43 43 Camino del Cerro del Águila, 3 (Ctra. de Castilla, km 5,180) – 28023 Madrid, Spain. Tel.: (+34) 91 357 08 09 Fax: (+34) 91 357 29 13 Copyright © 2002 IESE Business School. Working Paper WP no 451 January 2002 Rev. January 2006 CIIF
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IESE Business School-University of Navarra The CIIF, International Center for Financial Research, is an interdisciplinary center with an international outlook and a focus on teaching and research in finance. It was created at the beginning of 1992 to channel the financial research interests of a multidisciplinary group of professors at IESE Business School and has established itself as a nucleus of study within the School’s activities. Ten years on, our chief objectives remain the same: Find answers to the questions that confront the owners and managers of finance companies and the financial directors of all kinds of companies in the performance of their duties Develop new tools for financial management Study in depth the changes that occur in the market and their effects on the financial dimension of business activity All of these activities are programmed and carried out with the support of our sponsoring companies. Apart from providing vital financial assistance, our sponsors also help to define the Center’s research projects, ensuring their practical relevance. The companies in question, to which we reiterate our thanks, are: Aena, A.T. Kearney, Caja Madrid, Fundación Ramón Areces, Grupo Endesa, Royal Bank of Scotland and Unión Fenosa. http://www.iese.edu/ciif/
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IESE Business School-University of Navarra VALUING COMPANIES BY CASH FLOW DISCOUNTING: TEN METHODS AND NINE THEORIES Pablo Fernández* Abstract This paper is a summarized compendium of all the methods and theories on company valuation using 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.
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IESE Business School-University of Navarra VALUING COMPANIES BY CASH FLOW DISCOUNTING: TEN METHODS AND NINE THEORIES *
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