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Cash Flow Valuation

This paper aims (a) to show that the expression for the weighted average cost of capital generally used in the finance literature is only valid if the firm's debt is short-term in nature, and to provide an alternative expression that is valid irrespective of the maturity of the firm's debt; (b) to develop a new method for forecasting the cost of levered equity; (c) to show that it is possible to determine the enterprise value and the cost of unlevered equity simultaneously through a numerical search using the enterprise cash flow forecast; and (d) to demonstrate that enterprise valuations may be performed without reference to Modigliani and Miller's concept of tax-shield risk. This paper collects and improves the results of Schmidle (2006a, b, c), while at the same time correcting the inappropriate definition of the cost of levered equity used there.