Consistency in Valuation: A Practical Guide

Ignacio Velez-Pareja () and Antonio Burbano ()

No 2192, Proyecciones Financieras y Valoración from Master Consultores

Abstract: 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), the capital cash flow (CCF) and the tax savings or tax shield (TS). Secondly, they have to do with the proper expression for the cost of levered equity, Ke and different formulations for the weighted average cost of capital, WACC, 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). We illustrate the consistency using a simple example. In the Appendixes we show some algebraic derivations.

Keywords: free cash flow (search for similar items in EconPapers)
JEL-codes: M21 (search for similar items in EconPapers)
Pages: 44
Date: 2005-05-19
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:002192

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