Consistent Valuation Cash Flow

Uzi Yaari (), Andrei Nikiforov (), Emel Kahya () and Yochanan Shachmurove
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Uzi Yaari: Rutgers School of Business, Camden, NJ
Andrei Nikiforov: Rutgers School of Business, Camden, NJ
Emel Kahya: Rutgers School of Business, Camden, NJ

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: 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).

Keywords: Financial Reporting; Free Cash Flow; Net Working Capital; Cost of Capital; Corporate Valuation; Project Valuation (search for similar items in EconPapers)
JEL-codes: G30 G31 G32 G35 G38 H32 K22 L21 M14 M40 M41 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2012-03-15
New Economics Papers: this item is included in nep-acc and nep-bec
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