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Capital Cash Flows, APV and Valuation

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  • Laurence Booth

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

  • Laurence Booth, 2007. "Capital Cash Flows, APV and Valuation," European Financial Management, European Financial Management Association, vol. 13(1), pages 29-48, January.
    • Handle: RePEc:bla:eufman:v:13:y:2007:i:1:p:29-48
    DOI: 10.1111/j.1468-036X.2006.00284.x
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    References listed on IDEAS

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    3. Shigufta Hena Uzma & J.P. Singh & Naveen Kumar, 2010. "Discounted Cash Flow and Its Implication on Intangible Valuation," Global Business Review, International Management Institute, vol. 11(3), pages 365-377, October.
    4. Andrianos E. Tsekrekos & Mark B. Shackleton & Rafał Wojakowski, 2012. "Evaluating Natural Resource Investments under Different Model Dynamics: Managerial Insights," European Financial Management, European Financial Management Association, vol. 18(4), pages 543-575, September.
    5. Nguyen Kim-Duc & Pham Khanh Nam, 2024. "Consistent valuation: extensions from bankruptcy costs and tax integration with time-varying debt," Review of Quantitative Finance and Accounting, Springer, vol. 62(2), pages 719-754, February.
    6. Qi Howard, 2010. "Valuation Methodologies and Emerging Markets," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 5(1), pages 1-18, April.
    7. Fernandez, Pablo, 2007. "A more realistic valuation: APV and WACC with constant book leverage ratio," IESE Research Papers D/715, IESE Business School.
    8. Qi, Howard, 2011. "Value and capacity of tax shields: An analysis of the slicing approach," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 166-173, January.
    9. Mike Dempsey, 2013. "Consistent Cash Flow Valuation with Tax†Deductible Debt: a Clarification," European Financial Management, European Financial Management Association, vol. 19(4), pages 830-836, September.
    10. Michael Dempsey, 2019. "Discounting methods and personal taxes," European Financial Management, European Financial Management Association, vol. 25(2), pages 310-324, March.

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