In cash flow valuation, on grounds of simplicity, it is common to assume that the leverage is constant over time. With constant leverage, the return to levered equity is constant and consequently, the Weighted Average Cost of Capital (WACC) applied to the Free Cash Flow is constant. However,...

Though an increasing number of companies worldwide are using EVA as a measure of corporate performance, it is often criticized as being a wrong measure of corporate performance. It is often argued that the market forms expectations on the market value of the company and not on the book value of...

Veacute;lez-Pareja and Tham, 2003a, Veacute;lez-Pareja and Tham, 2003b and Tham and Veacute;lez-Pareja, 2004 showed the matching between discounted cash flow (DCF) methods and value added methods. They departed from the net operating profit less adjusted taxes NOPLAT and net income when using...

We show that project evaluation should be based on free cash flows at nominal prices. We present a case where the results from the constant price method are biased upwards and there is a risk to accept bad projects. It is a widespread practice to evaluate projects at constant prices. With an...

Surprisingly there is a wide range of interpretations on how to calculate the cash flows for valuation purposes. This ample definition of what the cash flows are is shared by academicians and practitioners. Some of the definitions openly contradict the essential and basic concepts of cash flow...

We examine a firm's choice of a measurement system designed to serve two distinct objectives; provide forward-looking information about future firm productivity and ex post information about past managerial performance. A firm can have two separate measurements, one for each purpose, or a single...

This paper reviews the theoretical foundations of residual income as a tool for evaluating a firm's interim performance for purposes of assigning incentive compensation. Although residual income can be easily linked to the discounted cash flow model of firm valuation, it bears no necessary...

This study contributes to the valuation of employee stock options (ESO) in two ways. First, a new pricing model is presented, allowing a major part of calculations to be solved in closed form. It incorporates a vesting period and independent, forced terminations of the contract. Designed with a...

In models by Fershtman and Judd (1987) and Sklivas (1987), firms competing in quantities benefit strategically from commiting to managerial incentives that are biased toward revenue maximization. Little empirical evidence has been produced in support of these models, and their assumption that...