Discounted Cash Flow: A Theory of the Valuation of Firms

List of Symbols.

List of Definitions, Theorems, etc.

Acknowledgments.

Introduction.

1. Basic Elements.

1.1 Fundamental terms.

1.1.1 Cash flows.

1.1.2 Taxes.

1.1.3 Cost of capital.

1.1.4 Time.

Problems.

1.2 Conditional expectation.

1.2.1 Uncertainty and information.

1.2.2 Rules.

1.2.3 Example.

Problems.

1.3 A first glance at business values.

1.3.1 Valuation concept.

1.3.2 Cost of capital as conditional expected returns.

1.3.3 A first valuation equation.

1.3.4 Fundamental theorem of asset pricing.

Problems.

1.4 Further literature.

2. Corporate Income Tax.

2.1 Unlevered firms.

2.1.1 Valuation equation.

2.1.2 Weak auto-regressive cash flows.

2.1.3 Example (continued).

Problems.

2.2 Basics about levered firms.

2.2.1 Equity and debt.

2.2.2 Earnings and taxes.

2.2.3 Financing policies.

2.2.4 Default.

2.2.5 Example (finite case continued).

Problems.

2.3 Autonomous financing.

2.3.1 Adjusted present value (APV).

2.3.2 Example (continued).

Problems.

2.4 Financing based on market values.

2.4.1 Flow to equity (FTE).

2.4.2 Total cash flow (TCF).

2.4.3 Weighted average cost of capital (WACC).

2.4.4 Miles-Ezzell– and Modigliani-Miller adjustments.

2.4.5 Example (continued).

Problems.

2.5 Financing based on book values.

2.5.1 Assumptions.

2.5.2 Full distribution policy.

2.5.3 Replacement investments.

2.5.4 Investment policy based on cash flows.

2.5.5 Example (continued).

Problems.

2.6 Other financing policies.

2.6.1 Financing based on cash flows.

2.6.2 Financing based on dividends.

2.6.3 Financing based on debt-cash flow ratio.

2.6.4 Comparing alternative forms of financing.

Problems.

2.7 Further literature.

3. Personal Income Tax.

3.1 Unlevered and levered firms.

3.1.1 ‘Leverage’ interpreted anew.

3.1.2 The unlevered firm.

3.1.3 Income and taxes.

3.1.4 Fundamental theorem.

3.1.5 Tax shield and distribution policy.

3.1.6 Example (continued).

Problems.

3.2 Excursus: Cost of equity and tax rate.

Problems.

3.3 Retention policies.

3.3.1 Autonomous retention.

3.3.2 Retention based on cash flow.

3.3.3 Retention based on dividends.

3.3.4 Retention based on market value.

Problems.

3.4 Further literature.

4. Corporate and Personal Income Tax.

4.1 Assumptions.

4.2 Identification and evaluation of tax advantages.

4.3 Epilogue.

Problems.

Appendix: Proofs.

A.1 Proofs of theorems.

A.2 Proof of theorem.

A.3 Proof of theorem.

A.4 Proofs of theorems.

A.5 Proof of theorem.

A.6 Proofs of theorems.

A.7 Proof of theorem.

A.8 Proof of theorem.

Index.