In this teaching note the reader finds a simplified financial model. In reality, financial models are huge and cumbersome. What we present is very simplified model in comparison to what is found in practice. We indicate the formulas that have to be utilized in the construction of the financial...

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...

Based on a theoretically correct model we examine the value the market assigns to different components of the cash flow to equity including “potential” dividends. We study publicly traded firms from five Latin American countries: Argentina, Brazil, Chile, Mexico and Peru during the period...

It is widely known that if the leverage is constant over time, then the cost of equity and the Weighted Average Cost of Capital (WACC) for the free cash flow, FCF, is constant over time. In other words, it is inappropriate to use a constant WACCFCF to discount the free cash flow (FCF) if the...

Using the model proposed by Velez-Pareja (2006) and assuming straight line depreciation we examine the conditions to assure a constant growth rate in a growing perpetuity. Our findings are that in practical terms for a growing perpetuity there are two options: either depreciation life is one...

Frequently analysts and teachers use the capitalized rate of interest for the cost of debt when forecasting and discounting cash flows. On the other hand, some authors (and analysts) estimate the interest payments when forecasting annual financial statements or cash flows based on the average of...

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...

We discuss some ideas useful when forecasting financial statements that are based on historical data. The chapter is organized as follows: First we discuss the relevance of prospective analysis for non traded firms. In a second section we a basic reviews of subjects that will be needed for...

In this teaching note we show how to use sensitivity analysis to consider uncertainty in the valuation of cash flows. We illustrate in a very simple way the use of the traditional identical percent change in the variables and an approximate approach that considers the probability of occurrence...

We examine the proper valuation of perpetuities without real growth. The case of a “pure” non growing perpetuity (zero real growth and zero inflation) is of academic interest but in practice it might be difficult to find. The findings contradict what is generally accepted in the literature....