Stochastic Discounted Cash Flow (Springer Texts in Business and Economics)

✍ Scribed by Kruschwitz

• Publisher: Springer
• Year: 2020
• Tongue: English
• Leaves: 256
• Category: Library

✦ Synopsis

This open access book discusses firm valuation, which is of interest to economists, particularly those working in finance. Firm valuation comes down to the calculation of the discounted cash flow, often only referred to by its abbreviation, DCF. There are, however, different coexistent versions, which seem to compete against each other, such as entity approaches and equity approaches. Acronyms are often used, such as APV (adjusted present value) or WACC (weighted average cost of capital), two concepts classified as entity approaches.

This book explains why there are several procedures and whether they lead to the same result. It also examines the economic differences between the methods and indicates the various purposes they serve. Further it describes the limits of the procedures and the situations they are best applied to. The problems this book addresses are relevant to theoreticians and practitioners alike.

✦ Table of Contents

Preface
Acknowledgements
Contents
List of Figures
List of Symbols
List of Definitions
List of Theorems
List of Assumptions
List of Rules
1 Introduction: A Stochastic Approach to Discounted Cash Flow
Reference
2 Basic Elements: Cash Flow, Tax, Expectation, Cost of Capital, Value
2.1 Fundamental Terms
2.1.1 Cash Flows
2.1.2 Taxes
2.1.3 Cost of Capital
2.1.4 Time
2.1.5 Problems
2.2 Conditional Expectation
2.2.1 Uncertainty and Information
2.2.2 Rules
2.2.3 Example
2.2.4 Problems
2.3 A First Glance at Business Values
2.3.1 Valuation Concept
2.3.2 Cost of Capital as Conditional Expected Returns
2.3.3 A First Valuation Equation
2.3.4 Fundamental Theorem of Asset Pricing
2.3.5 Transversality and Infinite Life Span
2.3.6 Problems
2.4 Further Literature
References
3 Corporate Income Tax: WACC, FTE, TCF, APV
3.1 Unlevered Firms
3.1.1 Valuation Equation
3.1.2 Weak Auto-Regressive Cash Flows
3.1.3 Example (Continued)
3.1.4 Problems
3.2 Basics About Levered Firms
3.2.1 Equity and Debt
3.2.2 Earnings and Taxes
3.2.3 Financing Policies
3.2.4 Debt and Transversality (Again)
3.2.5 Default
3.2.6 Example (Finite Case Continued)
3.2.7 Problems
3.3 Autonomous Financing
3.3.1 Adjusted Present Value (APV)
3.3.2 Example (Continued)
3.3.3 Problems
3.4 Financing Based on Market Values
3.4.1 Flow to Equity (FTE)
3.4.2 Total Cash Flow (TCF)
3.4.3 Weighted Average Cost of Capital (WACC)
3.4.4 Miles–Ezzell- and Modigliani–Miller Adjustments
3.4.5 Over-Indebtedness and Illiquidity with Financing Based on Market Values
3.4.6 Example (Continued)
3.4.7 Problems
3.5 Financing Based on Book Values
3.5.1 Assumptions
3.5.2 Full Distribution Policy
3.5.3 Replacement Investments
3.5.4 Investment Policy Based on Cash Flows
3.5.5 Example (Continued)
3.5.6 Problems
3.6 Other Financing Policies
3.6.1 Financing Based on Cash Flows
3.6.2 Financing Based on Dividends
3.6.3 Financing Based on Debt-Cash Flow Ratio
3.6.4 Comparing Alternative Forms of Financing
3.6.5 Problems
3.7 Further Literature
References
4 Personal Income Tax
4.1 Unlevered and Levered Firms
4.1.1 ``Leverage'' Interpreted Anew
4.1.2 The Unlevered Firm
4.1.3 Income and Taxes
4.1.4 Fundamental Theorem
4.1.5 Tax Shield and Distribution Policy
4.1.6 Example (Continued)
4.1.7 Problems
4.2 Excursus: Cost of Equity and Tax Rate
4.2.1 Problems
4.3 Retention Policies
4.3.1 Autonomous Retention
4.3.2 Retention Based on Cash Flow
4.3.3 Retention Based on Dividends
4.3.4 Retention Based on Market Value
4.3.5 Problems
4.4 Further Literature
References
5 Corporate and Personal Income Tax
5.1 Assumptions
5.2 Identification and Evaluation of Tax Advantages
5.3 Conclusion
5.4 Problem(s)
References
6 Proofs
6.1 Williams/Gordon–Shapiro Formula (Theorem 3.2) and Equivalence of Valuation Concepts (Theorem 3.3)
6.2 Valuation Formula with Investment Policy Based on Cash Flows (Theorem 3.21)
6.3 Adjusted Modigliani–Miller Formula (Theorem 3.22)
6.4 Valuation Formula with Financing Based on Cash Flows (Theorems 3.23 and 3.24)
6.5 Valuation with Financing Based on Dividends (Theorem 3.25)
6.6 Valuation with Debt-Cash Flow Ratio (Theorems 3.26 and 3.27)
6.7 Fundamental Theorem with Income Tax (Theorem 4.2)
6.8 Valuation Formula with Retention Based on Dividends (Theorem 4.9)
References
7 Sketch of Solutions
7.1 Basic Elements
7.1.1 Fundamental Terms
7.1.2 Conditional Expectation
7.1.3 A First Glance at Business Values
7.2 Corporate Income Tax
7.2.1 Unlevered Firms
7.2.1.1 Basics About Levered Firms
7.2.2 Autonomous Financing
7.2.3 Financing Based on Market Values
7.2.4 Financing Based on Book Values
7.2.5 Other Financing Policies
7.3 Personal Income Tax
7.3.1 Unlevered and Levered Firms
7.3.2 Excursus: Cost of Equity and Tax Rate
7.3.3 Retention Policies
7.4 Corporate and Personal Income Tax
Index