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Background Note
| HBS Case Collection
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1995
(Revised from original version)
A Note on Capital Cash Flow Valuation
by
Richard S. Ruback
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Abstract
Presents the capital cash flow method for valuing risky cash flows. In this method cash flows are calculated to include the benefits of interest tax shields. In a capital structure, with just ordinary debt and common equity, capital cash flows equal the flows available to equity--net income plus depreciation less capital expenditure and the change in working capital--plus the cash interest paid to bondholders. The interest tax shields decrease taxable income and thereby increase cash flows. Since the interest tax shields are included in the cash flows, a before-tax interest rate that corresponds to the riskiness of the assets is appropriate to value the capital cash flows.
Keywords: Capital;
Cash Flow;
Valuation;