Practitioners and some academics use potential dividends rather than actual payments toshareholders for valuing a firm´s equity. We underline the differences between the two methods and present some arguments supporting the thesis that firm valuation with potential dividends overstate the...

This paper is an extension of a previous one untitled The Correct Definition for the Cash Flows to Value a Firm (Free Cash Flow and Cash Flow to Equity) . We have added a comparative analysis between the current practice of including as cash flows amounts that belong to the Balance Sheet and the...

In this short teaching note I explain why we subtract the change in working capital from the proper item (Earnings before interest and taxes (EBIT) or Net income) in the Income Statement. I show in detail how departing from the sales revenues and the cost of goods sold we have to subtract the...

Practitioners and academics in valuation include changes in liquid assets (potential dividends) in the cash flows. This widespread and wrong practice is inconsistent with basic finance theory. We present economic, theoretical, and empirical arguments to support the thesis. Economic arguments...

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...

In theory, different valuation methods, with consistent assumptions, must give identical results. Numerical examples that purport to illustrate the theory should demonstrate the identical results. Unfortunately, in popular textbooks it is all too easy to find numerical examples that are at odds...

La versión española de este artículo se puede encontrar en: 'http://ssrn.com/abstract=2685207' http://ssrn.com/abstract=2685207.We discuss the relevance of personal taxes on Tax Shields. Interest and taxes are the basis for defining an optimal capital structure. When personal taxes are...

This paper presents the derivation of non-circular formulas for the calculation of the cost of equity, WACC, equity value (as a function either of initial debt or leverage), and levered firm value, using some previous results and showing their consistency with other well-known expressions....

We present the derivation of cost of capital under the assumption of risky tax shields discounted with the cost of levered equity. We show that the formulation is consistent and is derived from basic financial principles. This formulation is valid for finite cash flows and non growing...