Consistent Valuation Cash Flow
This paper seeks to draw attention to a flaw in the firm’s Free Cash Flow model and related statement widely accepted in Corporate Finance. We argue that the common offset of any Current Liabilities against Current Assets distorts the FCF size, composition, and volatility, thereby misstating the firm or project size, debt and assets composition, financial leverage, risk profile, and estimated value. We demonstrate empirically that the offset opens opportunities to manipulate the FCF by systematically overstating its size and understating its volatility. We propose to avoid any offset and rename the standardized statement "Valuation Cash Flow" (VCF).
|Date of creation:||15 Mar 2012|
|Date of revision:|
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NBER Working Papers
5602, National Bureau of Economic Research, Inc.
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