In cash flow valuation, on grounds of simplicity, it is common to assume that the leverage is constant over time. With constant leverage, the return to levered equity is constant and consequently, the Weighted Average Cost of Capital (WACC) applied to the Free Cash Flow is constant. However,...

Vélez-Pareja and Tham, 2003a, Vélez-Pareja and Tham, 2003b and Tham and Vélez-Pareja, 2004 showed the matching between discounted cash flow (DCF) methods and value added methods. They departed from the net operating profit less adjusted taxes NOPLAT and net income when using market values to...

En Vélez-Pareja y Tham (2003), se presentó la forma de hacer coincidir los métodos de valor agregado (utilidad económica (UE) (Residual Income Method, RIM) y el valor económico agregado (VEA) (Economic Value Added, EVA)) y los métodos de flujo de caja descontado (discounted cash flow,...

We derive and present the formula for optimal debt under the assumption that tax shields are discounted at the cost of levered equity, Ke and cash flows are on perpetuity. The formulation is consistent and is derived from basic financial principles. This formulation is valid for non-growing...

Se presenta la derivación de costo de capital bajo la premisa del ahorro deimpuestos de riesgo descuento con el costo de capital apalancado. Se demuestraque la formulación es coherente y se deriva de los principios financieros básicos. Esta formulación es válida para los flujos de caja...

In “Consistency in Chocolate: A Fresh Look at Copeland’s Hershey Foods & Co Case” we showed the inconsistencies regarding the assumption of constant leverage and the inconsistency in the values for equity calculated with different approaches. In this second part we show the differences in...

There are methods to match value added approaches (Residual Income Method, RIM and Economic Value Added, EVA) with discounted cash flow methods, DCF. In this note we use a real life case from an emerging country to illustrate the matching, with complexities such as unpaid taxes, losses carried...

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...

We discuss some ideas useful when forecasting financial statements that are based on historical data.The chapter is organized as follows: First we discuss the relevance of prospective analysis for non traded firms. In a second section we a basic reviews of subjects that will be needed for...

In theory, different valuation methods, with consistent assumptions, must give identical results. Numerical examples that purport to illustrate the theory should demonstrate the identical results. Unfortunately, in popular textbooks it is all too easy to find numerical examples that are at odds...