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Valuing Companies by Cash Flow Discounting: Fundamental Relationships and Unnecessary Complications

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Company valuation using discounted cash flows is based on the valuation of government bonds: it consists of applying the procedure used to value government bonds to the debt and shares of a company. This is easy to understand (sections 1, 2 and 3). But company valuations are often complicated by "additions" (formulae, concepts, theories…) to complicate its understanding (see sections 4 to 15) and to provide a more "scientific," "serious," "intriguing," "impenetrable" … appearance. Among the most commonly used "additions" are: WACC, beta ( ), market risk premium, beta unlevered, value of tax shields…. Most of these "additions" are unnecessary complications and are the source of many errors (section 16).

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  • Fernández, Pablo, 2013. "Valuing Companies by Cash Flow Discounting: Fundamental Relationships and Unnecessary Complications," IESE Research Papers D/1062, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-1062
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    1. Cooper, Ian A. & Nyborg, Kjell G., 2006. "The value of tax shields IS equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 81(1), pages 215-225, July.
    2. Fernandez, Pablo, 2007. "A more realistic valuation: APV and WACC with constant book leverage ratio," IESE Research Papers D/715, IESE Business School.
    3. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
    4. Isik Inselbag & Howard Kaufold, 1997. "Two Dcf Approaches For Valuing Companies Under Alternative Financing Strategies (And How To Choose Between Them)," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(1), pages 114-122, March.
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    6. Fernandez, Pablo, 2004. "The value of tax shields is NOT equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 73(1), pages 145-165, July.
    7. Miles, James A. & Ezzell, John R., 1980. "The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(3), pages 719-730, September.
    8. Fernandez, Pablo, 2004. "Reply to "The value of tax shields is equal to the present value of tax shields"," IESE Research Papers D/576, IESE Business School.
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