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Cash-flow-based valuation focuses on free cash flow generation. This method determines the share value as the present va...

Cash-flow-based valuation focuses on free cash flow generation. This method determines the share value as the present value of the free cash flows that are available to its holders. This is based off of first payments to operations and debt. An example of this method that is popular is the Discounted cash flows. It estimates the value of an investment based on future cash flows.

What does everyone think about this statement? Do you agree or disagree?

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Answer #1

The statement is correct. Cash flow valuation is based on the fact that the current value of an investment is the sum of the present value of all future cash flows. Intuitively, this makes sense because when one invests in an asset, one is interested in what cash flows that asset is going to generate and at what cost. This is what cash flow based valuation does. It calculates the cash flows which will flow to the investors (either entire firm or equity holders) and discounts them back to the present using the appropriate cost (either capital cost or equity cost).

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