A Note on Capital Cash Flow Valuation

Richard S. Ruback

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

A Note on Capital Cash Flow Valuation

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;

Format: Print

13 pages

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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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A Note on Capital Cash Flow Valuation

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