Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows
This paper presents the Capital Cash Flow (CCF) method for valuing risky cash flows. I show that the CCF method is equivalent to discounting Free Cash Flows (FCF) by the weighted average cost of capital. Because the interest tax shields are included in the cash flows, the CCF approach is easier to apply whenever debt is forecasted in levels instead of as a percent of total enterprise value. The CCF method retains its simplicity when the forecasted debt levels and the implicit debt-to-value ratios change throughout forecast period. The paper also compares the CCF method to the Adjusted Present Value (APV) method and provides consistent leverage adjustment formulas for both methods.
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Volume (Year): 31 (2002)
Issue (Month): 2 (Summer)
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