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Constant leverage modeling: A reply to "A tutorial to the Mckinsey model for valuation of companies"

Author

Listed:
  • Ignacio Velez-Pareja
  • Joseph Tham

Abstract

In this note we analyze the tutorial based on the McKinsey methodology for valuing companies. We have found that the McKinsey methodology has one of the most common mistakes mentioned in Tham and Vélez-Pareja (2004a and b): valuing cash flows with a constant cost of capital when the leverage is not constant. We calculate the proper firm andequity values by assuming the free cash flow, FCF calculated in the tutorial, and deriving the cash flow to equity, CFE. We develop the proper calculations of firm and equity values for constant leverage as well. For both calculations we calculate the deviations from the values calculated in the tutorial.

Suggested Citation

  • Ignacio Velez-Pareja & Joseph Tham, 2008. "Constant leverage modeling: A reply to "A tutorial to the Mckinsey model for valuation of companies"," Proyecciones Financieras y Valoración 4574, Master Consultores.
    • Handle: RePEc:col:000463:004574
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    Cited by:

    1. Ignacio Vélez-Pareja & Rauf Ibragimov & Joseph Tham, 2008. "Constant Leverage And Constant Cost Of Capital: A Common Knowledge Half-Truth," Estudios Gerenciales, Universidad Icesi, June.

    More about this item

    Keywords

    Valuation; free cash flow; discounting; accounting data;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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