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  • November 1994 (Revised January 1995)
  • Background Note
  • HBS Case Collection

A Note on Capital Cash Flow Valuation

By: Richard S. Ruback
  • Format:Print
  • | Pages:13
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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

Citation

Ruback, Richard S. "A Note on Capital Cash Flow Valuation." Harvard Business School Background Note 295-069, November 1994. (Revised January 1995.)
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About The Author

Richard S. Ruback

Finance
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