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The Valuation of Cash Flow Forecasts: An Empirical Analysis
Author(s) -
KAPLAN STEVEN N.,
RUBACK RICHARD S.
Publication year - 1995
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1995.tb04050.x
Subject(s) - valuation (finance) , discounted cash flow , cash flow , terminal value , econometrics , database transaction , economics , financial economics , market value , intrinsic value (animal ethics) , cash flow forecasting , operating cash flow , actuarial science , business , finance , computer science , programming language , philosophy , environmental ethics
This article compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. For our sample of 51 HLTs completed between 1983 and 1989, the valuations of discounted cash flow forecasts are within 10 percent, on average, of the market values of the completed transactions. Our valuations perform at least as well as valuation methods using comparable companies and transactions. We also invert our analysis by estimating the risk premia implied by transaction values and forecast cash flows, and relating those risk premia to firm and industry betas, firm size, and firm book‐to‐market ratios.