Practitioners and academics in valuation include changes in liquid assets (potential dividends) in the cash flows. This widespread and wrong practice is inconsistent with basic finance theory. We present economic, theoretical, and empirical arguments to support the thesis. Economic arguments...

Although we know there exists a simple approach to solve the circularity between value and the discount rate, known as the Adjusted Present Value proposed by Myers, 1974, it seems that practitioners still rely on the traditional Weighted Average Cost of Capital, WACC approach of weighting the...

In this note we analyze the tutorial based on the McKinsey methodology for valuing companies. We have found that the McKinsey methodology has one of the most common mistakes mentioned in Tham and Vélez-Pareja (2004a and b): valuing cash flows with a constant cost of capital when the leverage is...

Since the Modigliani and Miller 1958 seminal paper, there has been a problem posed by the fact that the discount rate to value cash flows depends on the value of thesecash flows. This gives raise to the circularity problem.In this paper we propose an analytical solution to this circularity...

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...

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...

Este es material de curso del libro Decisiones Empresariales bajo Riesgo e Incertidumbre. El nivel del libro es basico. Se usan muy pocas matematicas y puede ser usado por gerentes. En el capitulo siete se mencionan diferentes enfoques para la valoracion de las empresas. Se calculan los flujos...

In the Weighted Average Cost of Capital (WACC) applied to the free cash flow (FCF), we assume that the cost of debt is the market, unsubsidized rate. With debt at the market rate and perfect capital markets, debt only creates value in the presence of taxes through the tax shield. In some cases,...