Elsevier S & T

Principles of Cash Flow Valuation: An Integrated Market-Based Approach

Tham, Joseph; Velez-Pareja, Ignacio

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Table of contents
  • Cover
  • Copyright Pageiv
  • CONTENTSix
  • PREFACExvii
  • ABOUT THE AUTHORSxxvii
  • Chapter 1. Basic Concepts in Market-Based Cash Flow Valuation1
  • 1.1 Introduction1
  • 1.2 Market-Based Procedure for Valuation3
  • 1.3 Steps in Cash Flow Valuation4
  • 1.4 Present Value7
  • 1.5 The Standard After-Tax Weighted Average Cost of Capital12
  • 1.6 Types of Cash Flows13
  • 1.7 Weighted Average Cost of Capital in an M & M World15
  • 1.8 WACC in an M & M World with Taxes19
  • 1.9 The Fundamental Free Cash Flow Relationship22
  • 1.10 The Main Valuation Methods and Formulas for Cost of Capital22
  • 1.11 The Cash Flow to Equity Approach25
  • 1.12 Estimating the Cost of Capital26
  • 1.13 Adjusted Present Value Approach28
  • 1.14 Various Formulations for the Cost of Capital28
  • 1.15 Summary and Concluding Remarks28
  • Chapter 2. Time Value of Money and Introduction to Cost of Capital31
  • 2.1 Introduction31
  • Section 133
  • 2.2 Nominal Prices, Constant Prices, and Real Prices38
  • 2.3 Risk Premium with the Capital Asset Pricing Model43
  • 2.4 Calculating PV with a Finite Stream of Cash Flows45
  • Section 253
  • 2.5 Valuation with a Finite Stream of Cash Flows53
  • 2.6 Summary and Concluding Remarks64
  • Appendix A65
  • A2.1 Calculating the PV with Cash Flow in Perpetuity (Without Growth)65
  • A2.2 WACC in an M & M World with Taxes70
  • A2.5 Free Cash Flow in Perpetuity with Growth79
  • A2.6 Cash Flow to Equity82
  • Appendix B84
  • B2.1 Using the CAPM to Find the Cost of Capital84
  • B2.2 Discount Rate for the Tax Shield is the Return to Unlevered Equity86
  • Chapter 3. Basic Review of Financial Statements and Accounting Concepts87
  • 3.1 Financial Statements and Accounting Concepts87
  • Section 188
  • 3.2 Balance Sheet89
  • 3.3 Working Capital91
  • 3.4 (Book) Value of Equity92
  • 3.5 Income Statement92
  • 3.6 Cash Flow Statement (CFS) According to GAAP96
  • 3.7 Cash Budget Statement98
  • 3.8 Differences between the CFS According to GAAP and the CB Statement103
  • 3.9 Integration of the Financial Statements104
  • Section 2105
  • 3.10 Preliminary Tables105
  • 3.11 Summary and Concluding Remarks110
  • Appendix A111
  • Appendix B116
  • Chapter 4. Constructing Integrated Pro-Forma Financial Statements, Part One121
  • 4.1 Basic Financial Statements121
  • 4.2 Simple Numerical Example122
  • 4.3 Goals and Policies for Selected Variables126
  • 4.4 Depreciation Schedule127
  • 4.5 Estimated Target Variables128
  • 4.6 Preliminary Tables for the Simple Example130
  • 4.7 Constructing the Financial Statements for the Simple Example137
  • 4.8 Detailed Cash Budget Statement in Year 5146
  • 4.9 Balance Sheet149
  • 4.10 Cash Flow Statement According to GAAP150
  • 4.11 Summary and Concluding Remarks152
  • Appendix A153
  • Chapter 5. Constructing Integrated Pro-Forma Financial Statements, Part Two159
  • 5.1 Constructing Financial Statements159
  • 5.2 Impact on Demand of Changes in Price and of Expenditures on Advertising and Promotion168
  • 5.3 Real Rate of Interest, the Risk-Premium for Debt, and the Reinvestment Return: Interest Rates Es174
  • 5.4 Depreciation Schedule175
  • 5.5 Initial Cash Budget for Year 0176
  • 5.6 Loan Schedule177
  • 5.7 Inventory and Quantity Purchased178
  • 5.8 Relationship between the Quantity Purchased and the Purchase Price179
  • 5.9 Cost of Goods Sold181
  • 5.10 Selling and Administrative Expenses182
  • 5.11 Receivables and Payables182
  • 5.12 The Logic of the Model183
  • 5.13 Constructing Financial Statements for the Complex Example185
  • 5.14 Summary and Concluding Remarks192
  • Appendix A193
  • Chapter 6. The Derivation of Cash Flows229
  • Section 1229
  • 6.1 Derivation of Free Cash Flows229
  • 6.2 The Fundamental Free Cash Flow Relationship230
  • Section 2235
  • 6.3 Deriving the FCF from the CB Statement235
  • 6.4 Total CCF Versus Operating CCF242
  • 6.5 Deriving the FCF from the CFS According to GAAP248
  • 6.6 Deriving the FCF from the EBIT in the IS249
  • 6.7 Deriving the CFE from the NI253
  • 6.8 Advantages of Using the Cash Budget Approach254
  • 6.9 Summary and Concluding Remarks255
  • Appendix A256
  • Appendix B258
  • Chapter 7. Using the WACC in Theory and Practice261
  • Section 1261
  • 7.1 Approaches to the Cost of Capital261
  • Section 2263
  • 7.2 Review of Basic Ideas263
  • Section 3269
  • 7.3 Three Simple Expressions for the Cost of Capital269
  • Section 4273
  • 7.4 General Framework273
  • Section 5278
  • 7.5 Numerical Examples with the Complex Example278
  • 7.6 Summary and Concluding Remarks283
  • Appendix A284
  • Appendix B290
  • Appendix C292
  • Chapter 8. Estimating the WACC for Non-Traded Firms297
  • 8.1 Practical Approaches to the Cost of Capital for Traded and Non-Traded Firms297
  • 8.2 Finding the Relationship Between Levered and Unlevered Betas298
  • 8.3 Valuation for Traded Firms301
  • 8.4 Valuation for Non-Traded Firms305
  • 8.5 Summary and Concluding Remarks324
  • Appendix A325
  • Appendix B329
  • Appendix C331
  • Chapter 9. Beyond the Planning Period: Calculating the Terminal Value333
  • 9.1 Introduction333
  • 9.2 Operation Versus Liquidation334
  • 9.3 Calculating the Salvage (or Liquidation) Value335
  • 9.4 Terminal Value Versus Salvage Value335
  • 9.5 The Standard Approach for Estimating the TV336
  • 9.6 TV Calculated for the Discounted Cash Flow Method Using NOPLAT and Constant Leverage342
  • 9.7 Amount of Reinvestment for Growth in the FCF343
  • 9.8 Calculating the ROMVIC344
  • 9.9 Additional Adjustments345
  • 9.10 A Comment on Constant Leverage346
  • 9.11 Calculating TV with the CCF and APV Approaches350
  • 9.12 Summary and Concluding Remarks350
  • Appendix A351
  • Appendix B354
  • Appendix C360
  • Appendix D363
  • Chapter 10. Theory for Cost of Capital Revisited371
  • 10.1 Cost of Capital with a Finite Stream of Cash Flows371
  • 10.2 Numerical Example375
  • 10.3 Loan Schedule with Constant Leverage382
  • 10.4 Policy on Debt Financing and the WACC in the Presence of Taxes384
  • 10.5 The Miles and Ezzel (M & E) WACC386
  • 10.6 WACC for a Finite Stream of Cash Flows in an M & M World with Taxes388
  • 10.7 Fixed Percentage of Debt390
  • 10.8 Theory on the Cost of Capital Applied to Finite Cash Flows393
  • 10.9 Standard WACC Applied to the CCF395
  • 10.10 Standard After-Tax WACC Applied to the FCF396
  • 10.11 Return to (Levered) Equity398
  • 10.12 Alternative Adjusted WACC Applied to the FCF (Optional)400
  • 10.13 Alternative WACC Applied to the CCF (Optional)402
  • 10.14 Numerical Example403
  • 10.15 Adjusted Present Value (APV) Approach405
  • 10.16 Summary and Concluding Remarks408
  • Appendix A410
  • Appendix B413
  • Chapter 11. How Are Cash Flows Valued in the Real World419
  • 11.1 Introduction419
  • 11.2 Case study: TIMANCO S. A. E. S. P. Empresa de Telecomunicaciones427
  • 11.3 Valuation Methods Based on Book Values449
  • 11.4 Concluding Remarks458
  • Appendix A459
  • Appendix B462
  • SELECTED BIBLIOGRAPHY AND REFERENCES479
  • INDEX483
Book details
  • Vendor Elsevier S & T
  • SKU 9780126860405
  • ISBN-13 9780080514802
  • Author Tham, Joseph; Velez-Pareja, Ignacio
  • Category Business & Economics
  • Subject Finance

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The valuation of assets, both tangible and intangible, is an important element of corporate finance. Putting a price tag on ideas is almost impossible, and in the new economy, where companies grow dependent on intangible assets all the time, market volatility can be attributed in large part to our collective ignorance of their value. There are two basic approaches to valuation: from financial statements to cash flows, and from cash flows to financial statements. The former projects historical financial statements into the future and the latter attempts to construct cash flow statements and use them in forecasting future financial statements. Established companies use the first method and start-ups the second. In Principles of Cash Flow Valuation, the authors strive to "close the gap" between these two approaches by presenting the principles of cash flow valuation and cost of capital in a clear and systematic fashion.

* Provides the only exclusive treatment of cash flow valuation
* Authors use examples and a case study to illustrate ideas
* Presentation appropriate for a range of technical backgrounds: ideas are presented clearly, full exposition is also provided
* Named among the Top 10 financial engineering titles by Financial Engineering News