Equivalence of ten different methods for valuing companies by cash flow discounting
AbstractThis paper shows that ten methods of company valuation using cash flow discounting (WACC; equity cash flow; capital cash flow; adjusted present value; residual income; EVA; business's risk-adjusted equity cash flow; business's risk-adjusted free cash flow; risk-free-adjusted equity cash flow; and risk-free-adjusted free cash flow) always give the same value when identical assumptions are used. This result is logical, since all the methods analyze the same reality based upon the same assumptions; they only differ in the cash flows taken as the starting point for the valuation. We present all ten methods allowing the required return to debt to be different from the cost of debt. Seven of them require an iterative process. Only the APV and business risk-adjusted cash flows methods do not require iteration.
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Bibliographic InfoPaper provided by IESE Business School in its series IESE Research Papers with number D/524.
Length: 26 pages
Date of creation: 03 Nov 2003
Date of revision:
valuation; company valuation; WACC; equity cash flow; free cash flow; capital cash flow;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-16 (All new papers)
- NEP-CFN-2003-11-16 (Corporate Finance)
- NEP-RMG-2003-11-16 (Risk Management)
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