Capital Cash Flows, APV and Valuation

20 Pages Posted: 8 Jan 2007

See all articles by Laurence David Booth

Laurence David Booth

University of Toronto - Rotman School of Management

Abstract

This paper examines three different methods of valuing companies and projects: the adjusted present value (APV), capital cash flows (CCF) and weighted average cost of capital (WACC) methods. It develops the appropriate WACC and beta leveraging formulae appropriate for each valuation model, so that given a particular valuation model the correct APV and CCF values can be determined from the WACC value and vice versa. Further it goes on to show when the perpetuity formulae give poor estimates of the value of individual cash flows, even though the overall values are correct. The paper cautions that the APV and CCF models require more information than is currently known, such as the value of the corporate use of debt, and consequently can give misleading results, particularly in sensitivity analyses.

Suggested Citation

Booth, Laurence David, Capital Cash Flows, APV and Valuation. European Financial Management, Vol. 13, No. 1, pp. 29-48, January 2007, Available at SSRN: https://ssrn.com/abstract=955553 or http://dx.doi.org/10.1111/j.1468-036X.2006.00284.x

Laurence David Booth (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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