Chapter 17 - Discounted Cash Flow Valuation Methods: Perpetuities, Constant Growth, and General Case

Abstract

This chapter discusses discounted cash flow valuation methods. The chapter also discusses several concepts of cash flow that are used in the company valuation such as equity cash flow, free cash flow (FCF), and capital cash flow. The cash flows generated by the company are perpetual and constant (without growth). It is accepted that the company's total value (debt, equity, and tax) is independent of leverage—that is, there are no leverage-generated costs (there is no reduction in the expected FCF or any increase in the company's risk). The chapter tabulates the valuation of six different companies without growth. These companies differ in the tax rate, cost of debt, and size of the debt. There are four formulas for company valuation using discounted cash flows for a general case. The cash flows generated by the company may grow at a different rate each year, and thus all of the company's parameters can vary from year to year.