Constant leverage modeling: A reply to "A tutorial to the Mckinsey model for valuation of companies"

Ignacio Velez-Pareja () and Joseph Tham ()

No 4574, Proyecciones Financieras y Valoración from Master Consultores

Abstract: 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 not constant. We calculate the proper firm andequity values by assuming the free cash flow, FCF calculated in the tutorial, and deriving the cash flow to equity, CFE. We develop the proper calculations of firm and equity values for constant leverage as well. For both calculations we calculate the deviations from the values calculated in the tutorial.

Keywords: Valuation; free cash flow; discounting; accounting data (search for similar items in EconPapers)
JEL-codes: C60 G31 M41 (search for similar items in EconPapers)
Pages: 19
Date: 2008-03-25
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:004574

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