In the standard Weighted Average Cost of Capital (WACC) applied to the free cash flow (FCF), we assume that the cost of debt is the market, unsubsidized rate. With debt at the market rate and perfect capital markets, debt only creates value in the presence of taxes through the tax shield. In...

In this teaching note, we present an integrated, consistent market-based framework for valuing finite cash flows. We derive the relevant cash flows from integrated financial statements, and based on Modigliani and Miller's (M amp; M) theories, we estimate the appropriate cost of capital and...

In this note, we discuss two fundamental principles for Cash Flow Valuation (CFV). We hope that adherence to these two principles will improve the practice of CFV. These principles are general, relatively uncontroversial, and should be acceptable as starting points for cash flow valuation....

In this note, we comment on and discuss the weirdness and absurdity of the idea that Professor Fernandez has argued for. The weirdness or absurdity of a theory does not automatically disqualify a theory; however, perhaps another review of the implications of the theory may have some merit. It...

For cash flows in perpetuity without growth, analysts typically use the following formula for the return to levered equity Ke.lt;brgt;lt;brgt;Ke = Ku + (Ku shy; Kd)(1 shy; T)D/E (1) lt;brgt;lt;brgt;where Ku is the return to unlevered equity, Kd is the cost of debt, T is the tax rate, D is the...

In cash flow valuation (CFV), there are two main categories of mistakes: derivation of the appropriate cash flows and estimation of the cost of capital. A simple-minded view of the world would suggest that with near perfect capital markets, the presence of arbitrage would severely punish wrong...

There are many different ways to calculate the Weighted Average Cost of Capital (WACC) and for the beginner the plethora of possibilities may be very confusing. We present a general framework for classifying the WACCs that are applied to the FCF and the CCF. For the moment, we avoid...

For the practitioner, making sense of the bewildering number of theories on the cost of capital must be a truly challenging and daunting task. In a perfect world without taxes, the cost of capital formula for a finite stream of free cash flows, with debt and equity financing, is elegant, simple...

La versioacute;n espantilde;ola de este artiacute;culo se puede encontrar en lt;a href='http://ssrn.com/abstract=279460'gt;http://ssrn.com/abstract=279460lt;/agt;Most finance textbooks (See Benninga and Sarig, 1997, Brealey, Myers and Marcus, 1996, Copeland, Koller and Murrin, 1994, Damodaran, 1996,...