Principles of Cash Flow Valuation: An Integrated Market-Based Approach

The valuation of assets, both tangible and intangible, is an important element of corporate finance. Putting a price tag on ideas is almost impossible, and in the new economy, where companies grow dependent on intangible assets all the time, market volatility can be attributed in large part to our collective ignorance of their value. There are two basic approaches to valuation: from financial statements to cash flows, and from cash flows to financial statements. The former projects historical financial statements into the future and the latter attempts to construct cash flow statements and use them in forecasting future financial statements. Established companies use the first method and start-ups the second. In Principles of Cash Flow Valuation, the authors strive to "close the gap" between these two approaches by presenting the principles of cash flow valuation and cost of capital in a clear and systematic fashion.

* Provides the only exclusive treatment of cash flow valuation
* Authors use examples and a case study to illustrate ideas
* Presentation appropriate for a range of technical backgrounds: ideas are presented clearly, full exposition is also provided
* Named among the Top 10 financial engineering titles by Financial Engineering News

"This is an elegant and insightful exposition of the principles and techniques involved in valuation of cash flows...essential reading for anyone interested in understanding the issues."
Gangadhar P. Shukla, Professor of Public Policy, Duke University

"The book goes a long way toward bridging the gap between the application of cost benefit analysis and the theory of capital budgeting. The authors have distilled the essence of years of gathering academic wisdom in the study of cash flow analysis and the cost of capital."
Savvakis C. Savvides, Cyprus Development Bank

"[The authors] present a book full of useful hints and tips that will please the practitioner. Tham and Velez-Pareja in particular stress the importance of financial statements and their use in valuation."
Andreas Loffler, Professor, Lehrstuhl fur Banken und Finanzierung, Universitat Hannover

Principles of Cash Flow Valuation: An Integrated Market Approach provides a comprehensive and practical, market-based framework for the valuation of finite cash flows that are derived from a set of integrated financial statements, namely, the income statement, balance sheet, and cash budget. In addition to the standard cash flows such as the Free Cash Flow (FCF) and the Cash Flow to Equity (CFE), the book discusses the novel Capital Cash Flow (CCF) approach to valuation. A detailed numerical example illustrates the construction of the pro-forma financial statements. A separate chapter is devoted to calculations on the terminal value.

Cost of capital theory is presented in a progressive fashionfrom the simple and intuitive to the complexwith mathematic clarity and various numerical examples to facilitate understanding and learning.

Assuming perfect capitals, the authors derive the appropriate expressions for the Weighted Average Cost of Capital (WACC) and carefully explain the subtleties that underlie the different formulations of the WACC. In addition, the authors show that the Discount Cash Flow (DCF) methods are fully consistent with the Residual Income Model (RIM) and the Economic Value Added (EVA) approach.

About the Authors

Joseph Tham (thamjx@duke.edu) is visiting assistant professor at the Duke Center for International Development (DCID), Terry Sanford Institute of Public Policy at Duke University and a research associate at the Center for International Health and Development (CIHD) at Boston University School of Public Health (BUSPH). Ignacio Velez-Pareja (ivelez@poligran.edu.co) is Dean of the School of Industrial Engineering at Politecnico Grancolombiano in Bogota, Colombia.|"This is an elegant and insightful exposition of the principles and techniques involved in valuation of cash flows...essential reading for anyone interested in understanding the issues."
Gangadhar P. Shukla, Professor of Public Policy, Duke University

"The book goes a long way toward bridging the gap between the application of cost benefit analysis and the theory of capital budgeting. The authors have distilled the essence of years of gathering academic wisdom in the study of cash flow analysis and the cost of capital."
Savvakis C. Savvides, Cyprus Development Bank

"[The authors] present a book full of useful hints and tips that will please the practitioner. Tham and Velez-Pareja in particular stress the importance of financial statements and their use in valuation."
Andreas Loffler, Professor, Lehrstuhl fur Banken und Finanzierung, Universitat Hannover

Principles of Cash Flow Valuation: An Integrated Market Approach provides a comprehensive and practical, market-based framework for the valuation of finite cash flows that are derived from a set of integrated financial statements, namely, the income statement, balance sheet, and cash budget. In addition to the standard cash flows such as the Free Cash Flow (FCF) and the Cash Flow to Equity (CFE), the book discusses the novel Capital Cash Flow (CCF) approach to valuation. A detailed numerical example illustrates the construction of the pro-forma financial statements. A separate chapter is devoted to calculations on the terminal value.

Cost of capital theory is presented in a progressive fashionfrom the simple and intuitive to the complexwith mathematic clarity and various numerical examples to facilitate understanding and learning.

Assuming perfect capitals, the authors derive the appropriate expressions for the Weighted Average Cost of Capital (WACC) and carefully explain the subtleties that underlie the different formulations of the WACC. In addition, the authors show that the Discount Cash Flow (DCF) methods are fully consistent with the Residual Income Model (RIM) and the Economic Value Added (EVA) approach.

About the Authors

Joseph Tham (thamjx@duke.edu) is visiting assistant professor at the Duke Center for International Development (DCID), Terry Sanford Institute of Public Policy at Duke University and a research associate at the Center for International Health and Development (CIHD) at Boston University School of Public Health (BUSPH). Ignacio Velez-Pareja (ivelez@poligran.edu.co) is Dean of the School of Industrial Engineering at Politecnico Grancolombiano in Bogota, Colombia.