A Practical Guide for Consistency in Valuation: Cash Flows, Terminal Value and Cost of Capital

Ignacio Velez-Pareja () and Antonio Burbano Pérez ()

No 1927, Proyecciones Financieras y Valoración from Master Consultores

Abstract: Practitioners and teachers very easily break some consistency rules when doing or teaching valuation of assets. In this short and simple note we present a practical guide to call the attention upon the most frequent broken consistency rules. They have to do firstly with the consistency in the matching of the cash flows, this is, the free cash flow (FCF), the cash flow to debt (CFD), the cash flow to equity (CFE) and the tax savings or tax shield (TS). Secondly, they have to do with the proper expression for the cost of unlevered equity with finite cash flows and perpetuities. Thirdly, they have to do with the consistency between the terminal value and growth for the FCF and the terminal value and growth for the CFE. And finally, the proper determination of the cost of capital either departing from the cost of unlevered equity (Ku) or the cost of levered equity (Ke). In the Appendixes we show some algebraic derivations and an example.

Keywords: Cash flows; free cash flow; cash flow to equity; valuation; levered value; levered equity value; terminal value; cost of levered equity; cost of unlevered equity (search for similar items in EconPapers)
JEL-codes: G12 G31 J33 M21 M40 M41 (search for similar items in EconPapers)
Pages: 41
Date: 2003-12-09
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A Practical Guide for Consistency in Valuation: Cash Flows, Terminal Value and Cost of Capital (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:001927

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