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The mismatching of APV and the DCF in Brealey, Myers and Allen 8th edition of Principles of corporate finance, 2006

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  • Ignacio Velez-Pareja
  • Joseph Tham

Abstract

In the latest edition of Principles of Corporate Finance (Brealey, Myers and Allen, 2006) the authors use a finite cash flow example to illustrate the valuation procedure for using the Discounted Cash Flow (DCF) method with the free cash flow (FCF) and the Adjusted Present Value (APV). The two firm values obtained are different. They say that the ... difference [...] is not a big deal considering all the lurking risks and pitfalls in forecasting [...] cash flows". In this teaching note we show that the two methods give identical values when the proper discount rates are used."

Suggested Citation

  • Ignacio Velez-Pareja & Joseph Tham, 2008. "The mismatching of APV and the DCF in Brealey, Myers and Allen 8th edition of Principles of corporate finance, 2006," Proyecciones Financieras y Valoración 4586, Master Consultores.
    • Handle: RePEc:col:000463:004586
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    Keywords

    Cash flows; free cash flow; cash flow to equity; valuation; levered value; adjusted present value; APV; discounted cash flow; DCF; weighted average cost of capital; WACC; cost of unleveredequity; tax savings;
    All these keywords.

    JEL classification:

    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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