Principles of Cash Flow Valuation: An Integrated Market-Based Approach

“The book by Tham and Velez-Pareja is a very modern approach to valuation theory. The author’s focus is not the pure theory of valuation but rather they present a book full of useful hints and tips that will please the practician. Tham and Velez-Pareja in particular stress the importance of financial statements and their use in valuation. Many detailed examples make it easy not only to understand but also to apply valuation theory.”
— Professor Dr. Dr. Andreas Löffler,
Lehrstuhl für Banken und Finanzierung, Universität Hannover

“This is an elegant and insightful exposition of the principles and techniques involved in valuation of cash flows. The issues related to construction of cash flows and estimation of cost of capital under different scenarios that are vital to the valuation of firms and investments, are dealt with in a careful and straightforward fashion. The arguments are made in a clear and animated fashion and the presentation style is an interesting blend of rigorous analysis and simple illustrations. An essential reading for any one interested in understanding the issues associated with cash flow valuation and it should prove equally valuable to both scholars and practitioners.”
— Gangadhar P Shukla, Professor of Public Policy, Duke University

One of the Top Ten financial engineering titles published in 2003-2004 – Richard Norgate, Ph.D., Financial Engineering News

“The book goes a long way toward bridging the gap between the application of cost benefit analysis and the theory of capital budgeting. The authors have distilled the essence of years of gathering academic wisdom in the study of cash flow analysis and the cost of capital.”
―Savvakis C. Savvides, Cyprus Development Bank

“[The authors] present a book full of useful hints and tips that will please the practitioner. Tham and Velez-Pareja in particular stress the importance of financial statements and their use in valuation.”
―Andreas Loffler, Professor, Lehrstuhl fur Banken und Finanzierung, Universitat Hannover

Principles of Cash Flow Valuation: An Integrated Market Approach provides a comprehensive and practical, market-based framework for the valuation of finite cash flows that are derived from a set of integrated financial statements, namely, the income statement, balance sheet, and cash budget. In addition to the standard cash flows such as the Free Cash Flow (FCF) and the Cash Flow to Equity (CFE), the book discusses the novel Capital Cash Flow (CCF) approach to valuation. A detailed numerical example illustrates the construction of the pro-forma financial statements. A separate chapter is devoted to calculations on the terminal value.

Cost of capital theory is presented in a progressive fashion―from the simple and intuitive to the complex―with mathematic clarity and various numerical examples to facilitate understanding and learning.

Assuming perfect capitals, the authors derive the appropriate expressions for the Weighted Average Cost of Capital (WACC) and carefully explain the subtleties that underlie the different formulations of the WACC. In addition, the authors show that the Discount Cash Flow (DCF) methods are fully consistent with the Residual Income Model (RIM) and the Economic Value Added (EVA) approach.

About the Authors

Joseph Tham (thamjx@duke.edu) is visiting assistant professor at the Duke Center for International Development (DCID), Terry Sanford Institute of Public Policy at Duke University and a research associate at the Center for International Health and Development (CIHD) at Boston University School of Public Health (BUSPH). Ignacio Velez-Pareja (ivelez@poligran.edu.co) is Dean of the School of Industrial Engineering at Politecnico Grancolombiano in Bogota, Colombia.