In this paper we find restrictions for the value of a parameter used in defining the cost of capital for perpetuities and terminal values: the growth rate for the free cash flow. When defining the growth rate for the free cash flow the usual warning is to set it below the growth of the economy...

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...

Using a detailed data set of employee stock option grants, we compare observed stock-option-based pay plans to hypothetical cash-only or restricted-stock-based plans. We make a variety of assumptions regarding the possible benefits of options relative to cash or stock, and then use observed...

This is the first chapter of our book Principles of Cash Flow Valuation. It is an overview of what we present in the book. In this chapter, we present an informal introduction to the basic concepts and ideas in market-based cash flow valuation. The simplified exposition will provide sufficient...

This paper examines a multiperiod principal-agent model in which a divisional manager has superior information regarding the profitability of an investment project available to his division. The manager also contributes to the periodic operating cash flows of his division through personally...