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Top 9 (Unnecessary and Avoidable) Mistakes in Cash Flow Valuation

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  • Joseph Tham
  • Ignacio Vélez Pareja

Abstract

In cash flow valuation (CFV), there are two main categories of mistakes: derivation of the appropriate cash flows and estimation of the cost of capital. A simple-minded view of the world would suggest that with near perfect capital markets, the presence of arbitrage would severely punish “wrong” valuations and eradicate such mistakes in the derivations of cash flows and estimations of the cost of capital. Nonetheless, to the dismay of academics, such mistakes continue to exist and thrive. It is not clear why such “mistakes” persist in practice. in this paper we present our list of the “top eight” mistakes in cash flow valuation. In the age of the computer these mistakes are both unnecessary and avoidable. In the usual triumph of hope over experience, we are attempting to persuade analysts that they would benefit from paying attention to these mistakes. Ultimately, the (un)importance of the mistakes is an empirical question.

Suggested Citation

  • Joseph Tham & Ignacio Vélez Pareja, 2004. "Top 9 (Unnecessary and Avoidable) Mistakes in Cash Flow Valuation," Proyecciones Financieras y Valoración 3648, Master Consultores.
    • Handle: RePEc:col:000463:003648
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    Cited by:

    1. Ignacio Vélez-Pareja, 2007. "Cash Flow Valuation in an Inflactionary World. The Case of World Bank for Regulated Firms," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 6, pages 1-19, November.

    More about this item

    Keywords

    Cost of capital;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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