2010
Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed
CASH FLOWS VALUATION USING CAPITAL CASH
FLOW METHOD COMPARING IT WITH FREE CASH
FLOW METHOD AND ADJUSTED PRESENT VALUE
METHOD IN COMPANIES LISTED ON TEHRAN
STOCK EXCHANGE
Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed
Abstract
One firm valuation method is to use discounted cash flow. In this paper the valuation method of Capital
Cash Flow discounted at the Weighted Average Cost of Capital (WACC) before tax is represented and, as
a proof to its efficiency in Iran market, it is compared with two common methods, i.e. Free Cash Flow
discounted at the weighted average cost of capital after tax and the adjusted present value. For the same
purpose, 54 firms from among those companies listed on Tehran Stock Exchange were selected as sample
and their financial information for three-year financial period from 2004 to 2006 were collected and
analyzed by paired Student’s t-test. Research results showed that using an appropriate discount rate will
make the value calculated by Capital Cash Flow method become twice as much when using two methods
mentioned above.
Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and
Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange
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Business Intelligence Journal
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Introduction
Historically, human beings face with
restrictions for using resources. Such
restrictions always make them seeking the
best way to use these resources with highest
return and least cost. The manifestation
of this in the domain of financial issues
was discussions cited about financing
decisions and investment management.
Investors, analyzers and other users of
financial information attempt to achieve
the best investment opportunity relating
their accessible resources. Firms’ valuation
is a tool which can contribute them in this
respect. The obvious thing is that the higher
the firm’s value is the higher return will be
gained by holders of capital.
Due to importance of this issue, to date
numerous researches have been conducted
thereon and various methods have been
introduced for the development and
supplementation of firms’ valuation which
attempt not to include the weak points of
previous methods and rather to improve
their strong points. Thus, many researchers
and practitioners in accounting, particularly
in recent decades, have involved in this
domain and, also, in finding more applied
and modern methods.
Firms’ valuation with using cash flow
has been allocated a special position in
modern scientific accounting discussion.
This is confirmed by researches’ efforts
and presentation of new models in cash
flows valuation aiming at supplementation
and improvement of previous models and
convenience in application.
In new discussions of firms’ valuation,
taking into consideration of the value and
position of tax shield in calculating method,
especially in those countries with efficient
debt markets, is of particular importance.
This, in turn, has made a range of firms’
valuation methods the advert point of
all of which is the using of tax shield in
calculations.
One of the latest methods cited in this area
is the Capital Cash Flow (CCF) method. This
research aims at the representation of Capital
Cash Flow method and demonstration of its
effectiveness in Iran market through making
comparison with Free Cash Flow and
Adjusted present value methods.
Literature Review
Useful information builds the foundation
of decisions made by people participating
in capital market. Compilers of accounting
standards attempt to provide financial
reporting and accounting system of capital
market data requirements. Therefore,
analysis, investigation and, finally, using
suitable methods resulting in fair and correct
valuation, can lead to optimum allocation of
capital resources and selection of investment
opportunities.
Numerous efforts have been taken by
researches and practitioners in the field
of various methods of firms’ valuation a
compendium of which will be discussed
below:
Comparison of Various Firms’
Valuation Methods
In a market-based valuation, Tham (2000)
discounted Free Cash Flow at the weighted
average cost of capital (WACC) and the
effect of financing is taken into account by
adjusting the WACC.
He specified the following conditions for
firms’ valuation:
a. Multi-period investments and reinvestments,
b. Finite cash flows, with variable
growth rates,
Business Intelligence Journal - July, 2010 Vol.3 No.2
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Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed
c. Variable debt-equity ratios,
d. Losses carried forward.
With the inclusion of these conditions, the
analysis is more realistic. In this model, the
present value of the tax shield is discounted at
the required return with all-equity financing.
Using this method, the impacts of inflation
are directly incorporated into the analysis.
In addition, the model shows that the NPV
of the Free Cash Flow, discounted at the
WACC, is equal to the NPV of the Free Cash
Flow to the equity holder, discounted at the
annually adjusted return to equity.
The general approach applied by Tham
can be easily modified to take into account
the varied circumstances and complexities
which are often encountered.
Tham and X. Wonder (2002) argue that
traditional formulas of WACC calculation
would assume both debt and tax shield as
risk-free. But even when the debt is risk-free,
the tax shield can be risky. In addition, debt
and tax shield can be both risky as well. In
their survey, these two researches presented
a non-conventional new WACC for a period
with risky debt and tax shield and concluded
formulas relevant to return to equity and
debt. In contrast to preliminary formulas, in
method introduced for calculating WACC,
discount rate of tax shield is not limited to
risk-free rate and rate of return on capital.
They reviewed two conditions in their
survey:
1. Risk-free tax shield
(conventional conditions)
and
debt
2. Risky tax shield and debt
In section one of research a new formula
is presented for calculating WACC and Free
Cash Flow and Capital Cash Flow in first
condition; i.e. where the debt and the tax
shield which are both risk-free are calculated
and discounted at this rate. The obtained
result shows that Capital Cash Flow is equal
to Free Cash Flow plus tax shield.
In section two, the same assumptions
were reviewed for risky debt and tax shield
and in a dichotomous model for a period the
formulas relating to the discount rate of cash
flows were concluded.
During another survey, these two
researchers used Free Cash Flow, Capital
Cash Flow and Adjusted present value
methods for the valuation of levered firms
and tried to show that with using Miles and
Ezell’s model in calculation of tax shield,
the three methods above will give similar
responses. In Free Cash Flow method, the
tax shield is obtained by using discount
rate of the weighted average cost of capital.
Capital Cash Flow method might directly
add tax shield to the Free Cash Flow and
the adjusted present value method would
calculate it separately.
In section one the assumptions were
cited concerning three methods. In next
section, with using dichotomous model for
a five-year period the value of non-levered
firms was calculated by those three methods
mentioned above. And, in the final section
of research, the value of tax shield was
introduced in risk-free condition and, then,
the value of levered firms was calculated
through those three methods.
Research results indicate that the value
of levered firms increasingly depend upon
the assumption relating to the discount
rate of tax shield. With using dichotomous
model for the calculation of Free Cash
Flow and using Milles & Ezell’s theory in
tax shield calculation, it was shown that all
three methods will give similar responses to
levered firms’ valuation.
Cooper & Nyborg (2006) propose the
following four methods for firms’ valuation:
Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and
Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange
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Business Intelligence Journal
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1. Discounting operating Free Cash Flow
at the weighted average cost of capital
2. Discounting equity Free Cash Flow at
the cost of equity
3. Adjusted present value
4. Discounting the Capital Cash Flow at
the unlevered cost of capital
All above methods are based on a similar
theory: levered firms’ value is equal to
unlevered firms’ value plus present value of
tax shield arising from financing due to debt.
However, none of above methods can be
defined without discount rate for valuation.
These discount rates depend upon firm’s
leverage policy. The firm’s leverage policy
determines that what discount rate should
be applied for the proper estimation of tax
shield value and, consequently, firms’ value.
Therefore, all valuation methods should
start from a clear assumption about leverage
policy of firm.
In this survey, different hypotheses
about levered firm’s policy and that how
they are affected by following factors are
investigated:
1. Applicable discount rate
2. Present value of tax shield
3. Applicability of above methods
Then, different valuation methods and
the way to select from among them are
explained. Lastly, through model presented
by Booth (2002) and Fernandez (2004) it
was shown that how using wrong methods
will lead to mistakes which despite of their
being small, they will have major impacts
on calculations. Using wrong formulas can
result in an estimation of the present value of
tax shield which is very far from its correct
value.
In a survey, Fernandez took measures
for firms’ valuation through four methods
of: Discounting operating Free Cash Flow
at the weighted average cost of capital;
discounting equity Free Cash Flow at the
cost of equity; discounting the Capital
Cash Flow at the unlevered cost of capital;
Adjusted present value.
The research results indicated that firms’
valuation with using above four methods
will give similar responses. This conclusion
is logic as all of these methods analyze
a similar fact with similar assumptions.
These methods’ difference in institutions’
valuations is resulted from difference in tax
shield calculation. Hence, their difference
in term of various methods of tax shield
calculation is presented below:
Value of Tax Shield (VTS)
Valuable researches have been conducted
about cash flows valuation. Discrepancy
among these methods and different theories
on firms’ valuation using discounted cash
flows is arising from difference in the
calculation of tax shield. Interest paid on
debt is a cost subtracted from profit but no
tax is deducted for it, while tax is received
on dividend or the accumulated profit
dependent upon tax share. Thus, in presence
of debt, total payments to the debt holders
and shareholders will be higher.
In this paper, different theories are
presented for calculating present value of tax
shield. Upon analysis of the results obtained
from these theories it will be proved that
VTS is not the present value of the tax shield
discounted at a certain rate, rather it is the
difference between two present values:
present value of taxed paid in the unlevered
company minus the present value of the
taxes paid in the levered company. The
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Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed
2010
taxes of the unlevered companies have a risk
lower than that of the levered companies.
In following section, some of the major
researches and theories taken in this respect
are presented:
(1) Gordon & Shapiro [1956]
The model developed by Gordon &
Shapiro suggests that company’s profit will
grow in future by means of new investments.
This growth rate will be varied in predictable
periods and it will be constant and close to
economic growth rate for periods onwards.
(2) Modigliani and Miller [1963]
They studied the effect of leverage on
the firm’s value. The results of their study
indicated that in the absence of taxes, the
firm’s value is independent of its debts.
But, in the presence of taxes, required
return to equity will vary in proportion to the
debt/capital ratio:
Ke = Ku + ( DE ) (1 - T) (Ku - Kd)
E0 += Vu + DTD0
Where DT is the value of tax shield for
the case of perpetuities.
The goal of Modigliani and Miller was to
show the impact of tax on the value of debt.
In 1963, they used the following formulas
for firms’ valuation:
@ WACC = Ku 6 1E-+TDD
WACCBT = Ku - DT ;
^ Ku - Kd h
E
^ E + Dh
In the last presented equation, Modigliani
and Miller used book value instead of market
value for calculating debt/total debt ratio
and shareholders’ equity which is obviously
wrong.
(3) Myers [1974]
Myers introduced the Adjusted Present
Value (APV) method. According to Myers,
the value of the levered firms is equal to the
value of the firm with no interest (Vu) plus
the present value of the tax shield. On the
same basis, Mayers presented the following
formula:
VTS = PV 6 Kd; TDKd @
He believes that the risk of tax saving
due to debt is equal to the risk of the debt.
In 1997, Luehrman also recommended that
firms may be evaluated with using APV
method and they can calculate tax shield
based on Mayer’s method where the firm’s
value is as the same as:
PV = D + E = Vu + VTS
= PV6 Ku; FCF @ + 6 Kd; TDKd @
(4)Benninga and Sarig [1997]
Benninga and Sarig claimed that in
the presence of personal taxes (PT) in
calculations, Tax advantages of debt should
be discounted at discount rate after deduction
of personal taxes. According to their theory:
VTS = PV 6 Kd ^1 - TPDh;
DK 6^1 - TPDh^1 - T h^1 - TPAh@ @
(5) Arditti and Levy [1977]
In their research results, Arditti and Levy
explained that firms’ value may be calculated
by Capital Cash Flow instead of Free Cash
Flow. And, in this respect, it is necessary
to discount the Capital Cash Flow at the
weighted average cost of capital before tax
(WACCBT). In 1977, they had a substantial
Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and
Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange
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Business Intelligence Journal
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problem
in their
paper: for the calculation of
D
E
E +D
and E + D they used book value of
the debt and shareholders’ equity instead of
market value.
t-1
t-1
t-1
t-1
t-1
t-1
(6) Miller [1977]
Miller argues that the optimum debt
structure of collective companies indicates
the existence of such a structure for each
of them individually. Thereafter, Miller
introduces personal income tax and
corporate income tax. According to Miller,
firm’s value when no debt is assumed is
equal to:
Vu = FCF (1 - TPA)
Ku
Then he adds that firms’ attempts
made for making increase in their debts is
inconsistent with market balance. Increase
in debts causes changes in rate of return
on debt and rate of return to equity and,
thus, firm’s value under such conditions is
independent of rate of debts.
(7) Miller & Scholes [1978]
When the rate of income tax is higher
than rate of income on capital profit, most
investors will have to pay taxes higher than
their receivable dividend. Miller and Scholes
conclude that if corporate repurchases its
shares, it will make no preference between
dividend and realized gain on capital.
According to these researchers, firm’ value is
independent of the policy of firm’s dividend
payment.
(8) De Angelo and Masulis [1980]
De Angelo and Masulis extended Miller’s
study. With considering that the tax final
rate varies for different firms, they predict
that firms, instead of using debt, try to
reduce their taxes through other tools (e.g.
depreciation).
(9) Miles & Ezell [1980]
According to Miles and Ezell,
a firm
D
E
trying to have a constant ratio of , should
not use a valuation method similar to that
used by a firm with default debt.
In this respect, in firms with target debt
ratio the Free Cash Flow will be discounted
at the following rate:
WACC = Ku - 8
Kd T (1 + Ku)
D
E
;
D+EB
1 + Kd
Et - 1 + Dt - 1 = FCFt + Kd TDt - 1
Ku - g
Ku - g
(10) Miles & Ezell [1985]
The following formula shows the
relationship between the levered beta (βL)
with the asset beta (βu) (assuming a riskfree debt and a debt beta of zero):
bL = bU + DbU ;1 - TRF E /E
1 + RF
(11) Chambers, Harris & Pringle
[1982]
This group of researchers compared
four valuation methods for discounted cash
flows: equity cash flow discounted at the
required return to levered equity (Ke), Free
Cash Flow discounted at WACC, Capital
Cash Flow discounted at WACC before tax
and Adjusted present value methods. They
argue that in case of target debt the first three
methods will give similar results. But, when
there is no target debt, these methods will
result in different values. Only the Adjusted
present value will give the same results as
other three methods under both conditions.
Of course, firms are simply analyzed for one
financial period. The reason of such result
for their researches was a mistake: they had
Business Intelligence Journal - July, 2010 Vol.3 No.2
July
Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed
2010
used book value
instead of market value for
D
the ratio of E + D .
(12) Harris and Pringle [1985]
These two researchers suggest that
the present value of the tax shield should
be discounted at the required return to
unlevered equity (Ku).
VTS = PV (Ku; DKd T)
Also in their calculations they consider
that WACC before tax is equal to the required
return to equity. Thus, in their opinion:
WACC = Ku - DKd T/ (D + E)
(13) Ruback [1995]
Ruback uses the following formula to
give β of corporate.
bL = bU 8 D + E B - bD 8 D B
E
E
(14) Tham & Valez-Pareja [2001]
Following an arbitrage argument, Tham
& Valez-Pareja believe that the appropriate
discount rate for tax shields is Ku, the
required return to unlevered equity. Of
course, later it was shown that this approach
also comes to mistakes.
(15) Lewellen and Emery [1986]
In general, Lewellen and Emery believed
that Miles & Ezzell’s is the most logically
presented method until that time.
But, in method introduced by Modigliani
& Miler the tax shield was equal to:
VTS = PV 6 Ku; DTKu @
(16) Taggart [1991]
In his researches, Taggart gives a
summary of all valuation methods with or
without concerning personal income tax.
He suggests to use Miles & Ezzell’s when
the company adjusts to its target debt ratio
once a year and Harris & Pringle’s approach
when the company continuously adjusts to
its target debt ratio.
(17) Damodaran [1991]
If all the business risk is borne by the
corporate, then the formula relating the
levered beta (βL) with the asset beta (βu)
will be as follows:
bL = bU + ` D j bU (1 - T)
E
According to Damodaran, identification
of the beta of the debt under situations where
it has been dropped is not the same as when
the beta of the debt is assumed zero.
When the beta of the debt is zero, the
required return to debt should be the riskfree rate. The purpose of dropping of the
beta of the debt is to obtain a higher levered
beta.
Another formula is presented below to
show the relationship between levered beta
(βL) and the asset beta (βu):
bL = bU + ` D + E j
E
We call this method the Practitioners’
Method. This method is used by financial
consultants and investment institutions.
According to this mehtod, given the same
value for βu, a higher βL is obtained
than according to Fernandez (2004) and
according to Damodaran (1994).
Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and
Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange
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(18) Inselbag and Kaufold [1997]
They believe that in a case where
monetary value of debt is fixed, the value
of tax shield (VTS) may be given by Myers’
method. If the firm has a constant debt/value
ratio, the value of tax shield (VTS) will be
calculated through Miles and Ezell’s.
According to these researchers, present
value of tax shield of firms planning based
on amount of nominal debt is higher than
firms emphasizing on debt ratio. This theory
cannot be accepted for two reasons: firstly,
no firm has output operating cash flow for
having target debt ratio (instead of a target
debt outstanding). And, secondly, as we
know, the tax shield is the difference between
two present values of taxes in levered and
unlevered firms.
Inselbag and Kaufold argue that the risk of
target debt ratio is higher than that of having
target debt outstanding. If so, the present
value of taxes paid by levered firms should
be higher than that of firms with target debt
and, in consequence, the present value of tax
shield for the second-group firms should be
lower and this is opposed to the theory cited
by above-mentioned researchers.
(19) Copeland, Koller and Murrin
[2000]
The studies of this group of researches
confirmed the theories of Harris & Pringle
(1985) and Myers (1974) relating to present
value of tax shield and they concluded that
“we leave it to the reader’s judgment to
decide which approach best fits his or her
situation.”
(20) Fernandez [2001]
This researcher believes that where the
levered costs are zero, the value of tax shield
is equal to tax rate multiplied by debt value.
And, this value will be lower when levered
costs exist.
Research Design
The objective of this research is to
introduce Capital Cash Flow and to compare
it with two methods of Free Cash Flow and
Adjusted present value. Therefore, research
variables are presented as follows:
Studied Variables
Three studied variables including Capital
Cash Flow, Free Cash Flow and adjusted
present value are introduced as follows:
Capital Cash Flow
Capital Cash Flow includes all cash flows
paid or payable to investors. In this method,
Capital Cash Flows are the cash flows
available for all holders of the company’s
securities equivalent to the equity cash flow
after deduction of company’s assets tax.
Capital Cash Flow is calculated as
follows:
Capital Cash Flow = Net Income +
Depreciation - Capital expenditures ! 9
Working Capital + Interest
Net profit contains tax savings due to
interest expense of debt. Then, the impact of
cash flow adjustments including depreciation
expense, capital expenditures and capital
turnover are taken into account. At last,
upon addition of cash interest, the Capital
Cash Flow is obtained which indicates the
after-tax cash flow for investors. For the
same reason, it is discounted at the beforetax weighted average cost of capital which
is calculated as follows:
WACCAT = E Ke + D Kd
V
V
Business Intelligence Journal - July, 2010 Vol.3 No.2
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Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed
2010
Where D/V is the debt-to-value ratio; E/V
is the equity-to-value ratio, and KD and KE
are the respective expected debt and equity
returns.
On the other hand, capital assets
pricing model (CAPM) should be used for
calculating the required returns.
Ke = RF + be RP
Ke = RF + be RP
Where Rf is the risk-free rate, Rp is the
risk premium, Kd and Ke are the debt and
equity betas, respectively.
Free Cash Flow
The basic assumption in determination
of firm value with using Free Cash Flow is
that a trading unit’s value is resulted from
its power in making the operating cash flow
and other cash flows due to investment. This
is calculated as follows:
Free Cash Flow = earnings before interest
and taxes + estimated taxes +
cash adjustments
Since tax shield arising from interest
expense of debt has not been taken into
account in the calculation of Free Cash
Flow, it is necessary to use the weighted
average cost of capital after tax deduction.
Where:
WACCAT = E Ke + D Kd (1 - T)
V
V
T= effective tax rate
Other components of this equation were
represented before.
Adjusted Present Value Method
And, finally, the third method having
been presented in this survey is the adjusted
present value. This method was introduced
by Mayers and separates firm’s value into
two parts: unlevered operating cash flows
and cash flows depending upon project
financing.
Where:
APV = / tn= 0 FCF + / tn= 0 Int. t (Tc) t
1 + Kg
(1 - Kd)
Int. t = expense interest of debt in time t
Tc = effective income tax rate
Other components of this equation were
represented before.
In this model, firm’s value is initially
calculated with using firm’s capital expense
in the absence of debt and, then, the present
value of financing tax savings due to debt
is added to it. The reason of this separation
is to allow using different discount rates
depending upon risk rate for two parts.
Methodology of Research
Considering the structure of hypotheses
and the method used for data finding and
collection within the finite time of research,
statistical population was selected for three
consecutive years from 2004 to 2006 from
among companies listed on Tehran Stock
Exchange.
Cochran’s (1977) sample size formula1
was used for determining sample size
of firms for stratified random sampling.
Finally, 54 firms were selected as sample
within three years of testing course.
In next step, all data and information
needed for calculating firm’ value by three
represented methods were extracted from
financial information existing in stock
exchange, sites and other resources.
1
n=
NZ + Pq
Ne2 + Z2 Pq
Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and
Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange
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Business Intelligence Journal
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With considering the structure of survey
hypotheses and the collected data, paired
Student’s t-test was applied for data analysis.
Research Findings
Research’s First Hypothesis Testing
Results of Student’s t-test by SPSS
statistics software concerning the first
testable hypothesis are formulated in the
following tables:
Table 1. Paired samples Test for First Hypothesis
Research’s
Testing
Second
Hypothesis
Results of Student’s t-test by SPSS
statistics software concerning the second
testable hypothesis are formulated in the
following tables:
Correlation
N
Variables
0.99
54
CCF & FCF
Results show that there is a significant
relationship up to level sig=0.935 between
two variables of Capital Cash Flow and
Free Cash Flow which is higher than level
of 5%. On the other hand, the correlation
between two variables is 0.99 indicating that
two methods above are fully convergent and
when one of them is increased the other will
certainly increase and, also, with a decreased
Capital Cash Flow the Free Cash Flow will
also decrease. Also, as the upper and lower
limit at 95% confidence level are 0.042 and
0.039, respectively, and the logarithmic
difference of research variables is almost
close to zero it may accept that hypothesis
stating no difference
0.89
0.12
Sig. (2-tailed)
0.76
Df
CCF & APV
t
Table2. Paired Samples Correlation
Upper
0.935
95%
Confidence
Interval of
the Difference
Dower
53
Std. Error Mean
0.82
Std. Deviation
0.42
Mean
Sig. (2-tailed)
-0.39
Paired Differences
Variables
Df
0.2
t
0.15
between two methods of Capital Cash
Flow and Free Cash Flow. Therefore, in
general:
Hypothesis H0 is accepted. That is, α-level
of 5%, using Capital Cash Flow method in
the cash flows valuations would result in
similar results of Free Cash Flow.
Table 3. Paired samples Test for Second Hypothesis
Upper
Std. Deviation
0.016
95%
Confidence
Interval of
the Difference
Dower
Mean
CCF & FCF
Std. Error Mean
Variables
Paired Differences
July
0.032
0.16
-0.63
53
0.530
Table 4. Paired Samples Correlation
Variables
N
Correlation
CCF & APV
54
0.996
Results show that there is a significant
relationship up to level sig=0.530 between
two variables of Capital Cash Flow and
Adjusted present value which is higher
than level of 5%. On the other hand, the
correlation between two variables is 0.996
indicating that two methods above are
fully convergent and when one of them is
increased the other will certainly increase
and, also, with a decreased Capital Cash
Flow the Adjusted present value will also
decrease. Also, as the upper and lower limit
at 95% confidence level are 0.016 and 0.032,
respectively, and the logarithmic difference
Business Intelligence Journal - July, 2010 Vol.3 No.2
2010
Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed
of research variables is almost close to zero
it may accept that hypothesis stating no
difference between two methods of Capital
Cash Flow and Adjusted present value.
Therefore, in general:
Hypothesis H0 is accepted. That is, α-level
of 5%, using Capital Cash Flow method in
the cash flows valuations would result in
similar results of adjusted present value.
Summary and Conclusion
To date various methods of firms’
valuation have been presented by researches
and practitioners of financial issues, among
which one can mention using discounted
cash flows.
The objective of this survey is to
introduce Capital Cash Flow method for
firms’ valuation and confirmation of its
efficiency in Iran market through comparing
it with two common methods available
in market: Free Cash Flow and Adjusted
present value. For the same purpose, 54
firms listed on Tehran Stock Exchange were
selected as statistical sample. The required
information and data were collected through
stock exchange and other existing financial
resources and sites and they were tested by
paired Student’s t-test.
Test results showed that by using
appropriate discount rate and considering
the value of tax shield in calculations, the
application of Capital Cash Flow in firms’
valuation would lead to the same results as
those of two above-mentioned methods.
Suggestions and Prospective of
Future Researches
Firms valuation with using discounted
cash flows is an effective and extensive topic
in financial decision making and investment
opportunities which, in author’ opinion, has
challenging aspects to be subject of further
researches.
There are numerous methods and models
concerning firms’ valuation with using
discounted cash flows none of which neither
introduced in practice in Iran market nor
tested in terms of applicability. It is even
possible to analyze the efficiency of each
of these models upon the market situations
and the existing firms’ structure in term of
financing method.
In addition to discounted cash flows, there
are other methods and models for firms’
valuation the comparison of which can also
be subject of many future researches.
In this survey, some theories about
present value of tax shield are cited in brief.
Determination of the value of tax shield in
discussions on firms’ valuation is a very
important issue to form the starting point for
further researches.
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