Equivalence of ten different methods for valuing companies by cash flow discounting

Pablo Fernandez

No D/524, IESE Research Papers from IESE Business School

Abstract: This paper shows that ten methods of company valuation using cash flow discounting (WACC; equity cash flow; capital cash flow; adjusted present value; residual income; EVA; business's risk-adjusted equity cash flow; business's risk-adjusted free cash flow; risk-free-adjusted equity cash flow; and risk-free-adjusted free cash flow) always give the same value when identical assumptions are used. This result is logical, since all the methods analyze the same reality based upon the same assumptions; they only differ in the cash flows taken as the starting point for the valuation. We present all ten methods allowing the required return to debt to be different from the cost of debt. Seven of them require an iterative process. Only the APV and business risk-adjusted cash flows methods do not require iteration.

Keywords: valuation; company valuation; WACC; equity cash flow; free cash flow; capital cash flow (search for similar items in EconPapers)
JEL-codes: G12 G31 M21 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2003-11-03
New Economics Papers: this item is included in nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:iesewp:d-0524

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