Principles of Cash Flow Valuation: An Integrated Market-Based Approach (Graphics Series)

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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

Principles of Cash Flow Valuation: An Integrated Market-Based Approach (Graphics Series) Review

In the modern business environment, one of the most important tasks for CEOs and CFOs is related to the development of integrated and consistent business valuation models.

Tham & V?lez Pareja`s book is a well-oriented proposal in that sense and could be judged for what it has to offer: an organized and specific approach for structuring and valuating the firm cash flows with a special treatment in Non-Traded firms, and from that point of view a useful tool for fundamental valuation in emerging markets.

The authors begin with a definition of basic concepts in market-based cash flow valuation and a brief review of financial statements and accounting concepts, before explaining in full detail the integrated approach for the construction of four interrelated proforma financial statements: the Balance Sheet, the Income Statement, the Cash Flow Statement, and the annual Cash Budget Statement. These four financial statements form the basic building blocks for the valuation exercise.

Aditionally, Tham & V?lez Pareja have exposed several methods for deriving the firm cash flows. Special emphasis is given to the five advantages of deriving the Free Cash Flow from the Cash Budget Statement: simplicity, usefulness as a managerial tool, consistency, representation of reality and flexibility for purposes of sensitivity and scenario analysis.

Next, the authors have examined some critical issues related to the calculation of the Terminal Value and have exposed the need to guarantee the amount of reinvestment for growth in the Free Cash Flow, showing the importance of specifying the ROMVIC (Return on Market Value of Invested Capital).

The last part of the book is very useful from a practitioner?s point of view, because the case study enables the application of the main topics in the book.

This is not a book about sophisticated tools for valuing real options. It?s a book about how to construct integrated and consistent corporate valuation models, a simple but usually ignored necessity of good corporate financial models.

I would recommend the book to those who clearly understand the main topics of business valuation and its role in corporate finance, and are open-minded to new proposals in a well known field.

JUAN CARLOS GUTI?RREZ B.

FINANCE PROFESSOR

EAFIT University

Medell?n, Colombia

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