The mismatching of APV and the DCF in Brealey, Myers and Allen 8th edition of Principles of corporate finance, 2006

Ignacio Velez-Pareja () and Joseph Tham ()

No 4586, Proyecciones Financieras y Valoración from Master Consultores

Abstract: 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 firm values obtained are different. They say that the ... difference [...] is not a big deal considering all the lurking risks and pitfalls in forecasting [...] cash flows". In this teaching note we show that the two methods give identical values when the proper discount rates are used."

Keywords: Cash flows; free cash flow; cash flow to equity; valuation; levered value; adjusted present value; APV; discounted cash flow; DCF; weighted average cost of capital; WACC; cost of unleveredequity; tax savings (search for similar items in EconPapers)
JEL-codes: G12 G31 J33 M21 M40 (search for similar items in EconPapers)
Pages: 5
Date: 2008-04-01
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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:004586

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