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• W133712391 abstract "The literature on firm valuation recommends logical, quantitative methods, which deal with establishing today's value of future free cash flows. In this respect firm valuation is identical with the calculation of the discounted cash flow, which is often only given by its abbreviation, DCF. There are, however, different coexistent versions, which seem to compete against each other. Entity approach and equity approach are thus differentiated. Acronyms are often used, such as APV (adjusted present value) or WACC (weighted average cost of capital), whereby these two concepts are classified under entity approach. We see it as very important to systematically clarify the way in which these different variations of the DCF concept are related. Why are there several procedures and not just one? Do they all lead to the same result? If not, where do the economic differences lie? If so, for what purpose are different methods needed? And further: do the known procedures suffice? Or are there situations where none of the concepts developed up to now delivers the value of the firm? If so, how is the appropriate valuation formula to be found? There are three points, which differentiate our depiction of the DCF concept from the that of the literature up until now: (*) Cost of capital is definitely one of the key concepts in finance. Surprisingly, there is no definition of this term to be found in the literature that is precise enough that it can be used with logical operations to get valuation equations. Since we regard cost of capital as a central term, we have chosen to begin our considerations with its clarification. But then, several statements that are considered in the literature to be obviously true have to be proven by us. (*) As far as we can perceive, the information that the evaluator has on the firm to be valued plays no systematic role within the DCF literature. But it is in fact exactly this that can decide how the evaluator is to calculate. That is why we will always very precisely describe what information is supposed to be available when we develop a valuation equation. (*) We made the observation that in valuing a firm many practitioners lay little or no value upon the question as to the stochastic structure of the future cash flows. Practitioners are much more likely to limit themselves to estimating expectations of cash flows. If we fully comprehend the meaning of this, then valuation concepts which explicitly fall back upon the stochastic structure of payment patterns are excluded. We are thus concentrating on models, where the expectation of the cash flows is of central interest and extraneous information about its distribution is left out. The pdf-file has been removed on July, 20th 2005 because the book has been published by Wiley on November 2005." @default.
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• W133712391 date "2003-03-23" @default.
• W133712391 modified "2023-09-23" @default.
• W133712391 title "DCF (Part I)" @default.
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