Principles of Cash Flow Valuation An Integrated Market Based Approach Graphics Series 1st Edition by Joseph Tham, Ignacio Vélez Pareja ISBN 978-0126860405 0126860408

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Product details: 

ISBN 10:  0126860408

ISBN 13: 978-0126860405

Author: Joseph Tham, Ignacio Vélez-Pareja 

Principles of Cash Flow Valuation is the only book available that focuses exclusively on cash flow valuation. This text provides a comprehensive and practical, market-based framework for the valuation of finite cash flows derived from a set of integrated financial statements, namely, the income statement, balance sheet, and cash budget. The authors have distilled the essence of years of gathering academic wisdom in the study of cash flow analysis and the cost of capital. Their work should go a long way toward bridging the gap between the application of cost benefit analysis and the theory of capital budgeting.

This book covers the basic concepts in market-based cash flow valuation. Topics include the tme value of money (TVM) and an introduction to cost of capital; basic review of financial statements and accounting concepts; construction of integrated pro-forma financial statements; derivation of free cash flows; use of the WACC in theory and in practice; estimating the WACC for non traded firms; calculating the terminal value beyond the planning period. It also revisits the theory for cost of capital and explains how cash flows are valued in reality. The ideas are illustrated using examples and a case study. The presentation is appropriate for a range of technical backgrounds.

This text will be of interest to finance professionals as well as MBA and other graduate students in finance.

* 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

Table of contents: 

Chapter One: Basic Concepts in Market-Based Cash Flow Valuation
1.1 Introduction
1.1.1 Finite Streams of Cash Flows
1.1.2 Content and Organization of the Chapters
1.2 Market-Based Procedure for Valuation
1.2.1 Integrated Valuation Framework with Complete Financial Statements
1.3 Steps in Cash Flow Valuation
1.3.1 Why Invest?
1.3.2 The Role of Information and Expectations
1.4 Present Value (PV)
1.4.1 Perfect Capital Markets and Arbitrage Opportunities
1.4.2 Valuation in an Imperfect but Real World
1.4.3 Perfect Capital Markets
1.4.4 Replicating Portfolio Strategy
1.4.5 Traded Firms in the U.S. Stock Market
1.4.6 Traded Firms in an Emerging Market
1.5 The Standard After-Tax Weighted Average Cost of Capital (WACC)
1.6 Types of Cash Flows
1.6.1 What is FCF?
1.6.2 What is Cash Flow to (Existing) Debt?
1.6.3 What is Cash Flow to Equity (CFE)?
1.7 The WACC in a Modigliani & Miller (M & M) World
1.7.1 WACC in an M & M World Without Taxes
1.7.2 An Unlevered Company Versus a Levered Company
1.7.3 The No-Arbitrage Argument
1.7.4 Slicing the Cake
1.7.5 Debt and Equity Financing
1.7.6 Formula for the WACC Without Taxes
1.7.7 Equality of the Unlevered and Levered Returns
1.8 WACC in an M & M World With Taxes
1.8.1 The Expanding Cake
1.8.2 Why Firms Do Not Have 100% Debt?
1.9 The Fundamental FCF Relationship
1.10 The Main Valuation Methods and Formulas for Cost of Capital
1.10.1 The Tax Shield (TS)
1.10.2 After-Tax WACC Applied to the FCF
1.10.3 Alternative Expression for the WACC Applied to the FCF
1.10.4 The WACC With the CCF Method
1.10.5 Losses Carried Forward (LCF)
1.10.6 The FCF WACC Versus the CCF WACC
1.11 The CFE Approach
1.12 Estimating the Cost of Capital
1.13 The Adjusted Present Value (APV) Approach
1.14 Various Formulations for the Cost of Capital
1.15 Summary and Concluding Remarks

Chapter Two: Time Value of Money (TVM) and Introduction to Cost of Capital
2.1 Introduction
2.1.1 The Expected Inflation Rate
2.1.2 Relationship Between the Real Rate of Return and the Nominal Rate of Return
2.1.3 Expression for the Cost of Capital
2.2 Nominal Prices, Constant Prices and Real Prices
2.2.1 Expected Real Increase is 2% and Expected Inflation Rate is 3%
2.2.2 Expected Real Increase is 2% and Expected Inflation Rate is 0%
2.2.3 Expected Real Increase is 0% and Expected Inflation Rate is 3%
2.2.4 Real Increase is 0% and Expected Inflation Rate is 0%
2.2.5 The Use of Nominal Prices Versus Real Prices
2.2.6 Multi-Period Example with Nominal and Real Prices
2.3 Risk Premium With CAPM
2.4 Calculating (Present) Value With a Finite Stream of Cash Flows
2.4.1 Future Value With the Nominal Risk-Free Rate: Single Period Case
2.4.2 Time Value of Money (TVM)
2.4.3 Variable Rates of Return
2.4.4 The Discounting Process
2.4.5 Variable Discount Rates
2.4.6 Single and Multi-Period Cash Flows
2.4.7 Assessing an Investment Opportunity With the PV Concept
2.5 Valuation With a Finite Stream of Cash Flows
2.5.1 Unlevered Values
2.5.2 Debt Financing With Constant Leverage
2.5.3 (Present) Value of Tax Shield (TS)
2.5.4 The Corrected Return to Levered Equity and WACC
2.5.5 Alternative Formulation for the WACC With Circularity
2.5.6 After-Tax WACC Applied to the FCF
2.6 Summary and Concluding Remarks

Chapter Three: Basic Review of Financial Statements and Accounting Concepts
3.1 Financial Statements and Accounting Concepts
3.1.1 Pro-Forma Financial Statements
3.1.2 Integrated Framework
3.2 Balance Sheet
3.2.1 Assets
3.2.2 Current Assets
3.2.3 Liabilities
3.2.4 Current Liabilities
3.3 Working Capital
3.4 (Book) Value of Equity
3.5 Income Statement
3.5.1 Line Items in the Income Statement
3.5.2 Gross Profit
3.5.3 Earnings Before Interest and Taxes (EBIT)
3.5.4 EBT
3.5.5 Taxes
3.5.6 Net Income
3.5.7 Dividends
3.5.8 Retained and Accumulated Retained Earnings
3.6 Cash Flow Statement
3.6.1 Cash Flow from Operating Activities
3.6.2 Cash Flow from Investing Activities
3.6.3 Cash Flow from Financing Activities
3.7 Cash Budget Statement
3.7.1 Annual Cash Budget Statement
3.7.2 NCB Before Financing and Reinvestment
3.7.3 NCB After Debt Financing
3.7.4 NCB After Equity Financing
3.7.5 Reinvestment of Surplus Funds
3.7.6 Final NCB After Reinvestment
3.7.7 Cumulative Cash Balance
3.8 Differences Between the CFS According to GAAP and the CB Statement
3.9 Integration of the Financial Statements

Chapter Four: Constructing Integrated Pro-Forma Financial Statements, Part One
4.1 Basic Financial Statements
4.2 Simple Numerical Example
4.2.1 Basic Data for the Simple Example
4.2.2 Cash Required for Operations (CRO)
4.2.3 Reinvestment of Surplus Funds
4.2.4 Terminal Value Calculation
4.3 Goals and Policies for Selected Variables
4.4 Depreciation Schedule
4.5 Estimated Target Variables
4.5.1 Annual Sales Volume
4.5.2 Annual Sales Revenues
4.5.3 Selling and Administrative Expenses
4.6 Preliminary Tables for the Simple Example
4.6.1 Initial Cash Budget Statement for Year 0
4.6.2 Loan Schedule
4.6.3 Inventory and Purchases
4.6.4 Final Inventory in Year 1
4.6.5 Purchases (Units)
4.6.6 Cost of Goods Sold (COGS)
4.6.7 Receivables and Payables
4.6.8 Accounts Receivable
4.6.9 Accounts Payable
4.6.10 Cash Receipts and Cash Expenditures
4.7 Constructing the Financial Statements for the Simple Example
4.7.1 Cash Budget Statement in Year 0 Revisited
4.7.2 Cash Budget Statement for Year 1
4.7.3 Income Statement for Year 2
4.7.4 Iterations Between the Income Statement and Cash Budget Statement
4.7.5 Cash Budget Statement for Year 2
4.7.6 Completed Income Statement for All Years
4.7.7 Complete Budget Statement for All Years
4.7.8 Calculation of the New Loan in Year 4
4.8 Detailed Cash Budget Statement in Year 5
4.8.1 NCB Before Financing and Reinvestment in Year 5
4.8.2 NCB After Debt Financing in Year 5
4.8.3 NCB After Debt and Equity Financing in Year 5
4.8.4 Reinvestment of Surplus Funds in Year 5
4.8.5 Final NCB After Reinvestment in Year 5
4.8.6 Cumulative Cash Balance in Year 5
4.8.7 Adjustments in the Cash Budget Statement
4.9 Balance Sheet
4.10 Cash Flow Statement According to GAAP
4.11 Summary and Concluding Remarks

Chapter Five: Constructing Financial Statements, Part Two
5.1 The Construction of the Financial Statements
5.1.1 A Complex Example
5.1.2 Model Assumptions
5.1.3 Goals and Policies for Selected Variables
5.1.4 Relationship Between the Quantity Purchased and the Purchase Price
5.1.5 Simulation of Market Demand
5.2 Impact on Demand of Changes in Price and of Expenditures on Advertising and Promotion
5.2.1 Annual Sales
5.2.2 Impact on Demand of Change in Price
5.2.3 Impact on Demand of Expenditures on Advertising and Promotion
5.2.4 Preliminary Tables for the Complex Example
5.2.5 Annual Increase in the Volume of Sales
5.2.6 Annual Expenditures on Advertising and Promotion
5.2.7 Cash Requirements for Operations (CRO)
5.2.8 Expected Domestic Inflation Rate
5.2.9 Annual Sales Volume
5.2.10 Annual Sales Revenue
5.3 Real Rate of Interest, Risk-Premium for Debt, and Reinvestment Return: Interest Rates Estimation
5.4 Depreciation Schedule
5.5 Initial Cash Budget for Year 0
5.6 Loan Schedule
5.7 Inventory and Quantity Purchased
5.8 Cost of Goods Sold (COGS)
5.9 Selling and Administrative Expenses
5.10 Receivables and Payables
5.11 The Logic of the Model
5.12 Constructing the Financial Statements for the Complex Example
5.12.1 Income Statement
5.12.2 Cash Budget Statement
5.12.3 Balance Sheet
5.12.4 Cash Flow Statement
5.13 Summary and Concluding Remarks

Chapter Six: Derivation of Free Cash Flows (FCF) and Capital Cash Flow (CCF)
6.1 Derivation of the Free Cash Flows
6.2 The Fundamental Free Cash Flow (FCF) Relationship
6.2.1 CB Statement Versus Free Cash Flow
6.2.2 Operational Cash Flow
6.2.3 Inflation Adjustments for Financial Statements
6.2.4 Treatment of Tax Savings
6.3 Deriving the FCF From the CB Statement
6.3.1 Cash Flow to Equity (CFE)
6.3.2 Cash Flow to Debt
6.3.3 Tax Shields
6.3.4 Deferred Taxes
6.3.5 Total Free Cash Flow
6.3.6 Capital Cash Flow (CCF)
6.4 **Total

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Tags: Joseph Tham, Ignacio Vélez Pareja, Principles of Cash, An Integrated Market, Graphics Series