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The Valuation of Cash Flow Forecasts: An Empirical Analysis

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Author Info
Steven N. Kaplan
Richard S. Ruback

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Abstract

This paper compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. These forecasts are provided by management to investors and shareholders in 51 HLTs completed between 1983 and 1989. Our estimates of discounted cash flows are within 10%, on average, of the market values of the completed transactions. Our estimates perform at least as well as valuation methods using comparable companies and transactions. We also invert our analysis and estimate the risk premium implied by transaction values and forecast cash flows, and the relation of the implied risk premium to firm-level betas, industry-level betas, firm size, and firm book-to-market ratios.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4724.

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Date of creation: Apr 1994
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Handle: RePEc:nbr:nberwo:4724

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June. [Downloadable!] (restricted)
  2. Blume, Marshall E, 1975. "Betas and Their Regression Tendencies," Journal of Finance, American Finance Association, vol. 30(3), pages 785-95, June. [Downloadable!] (restricted)
  3. Kaplan, Steven N & Stein, Jeremy C, 1993. "The Evolution of Buyout Pricing and Financial Structure in the 1980s," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 313-57, May. [Downloadable!] (restricted)
  4. Olivier J. Blanchard, 1993. "Movements in the Equity Premium," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1993-2), pages 75-138. [Downloadable!]
  5. Klemkosky, Robert C & Martin, John D, 1975. "The Adjustment of Beta Forecasts," Journal of Finance, American Finance Association, vol. 30(4), pages 1123-28, September. [Downloadable!] (restricted)
  6. Cornell, Bradford & Green, Kevin, 1991. " The Investment Performance of Low-Grade Bond Funds," Journal of Finance, American Finance Association, vol. 46(1), pages 29-48, March. [Downloadable!] (restricted)
  7. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June. [Downloadable!] (restricted)
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