Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed. Abstract

2010 Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed 45 CASH FLOWS VALUATION USING CAPITAL CASH FLOW METHOD COMPARING IT WITH FREE CASH FLOW METHOD AND ADJUSTED PRESENT VALUE METHOD IN COMPANIES LISTED ON TEHRAN STOCK EXCHANGE Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed Abstract One firm valuation method is to use discounted cash flow. In this paper the valuation method of Capital Cash Flow discounted at the Weighted Average Cost of Capital (WACC) before tax is represented and, as a proof to its efficiency in Iran market, it is compared with two common methods, i.e. Free Cash Flow discounted at the weighted average cost of capital after tax and the adjusted present value. For the same purpose, 54 firms from among those companies listed on Tehran Stock Exchange were selected as sample and their financial information for three-year financial period from 2004 to 2006 were collected and analyzed by paired Student s t-test. Research results showed that using an appropriate discount rate will make the value calculated by Capital Cash Flow method become twice as much when using two methods mentioned above. Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange

46 Business Intelligence Journal July Introduction Historically, human beings face with restrictions for using resources. Such restrictions always make them seeking the best way to use these resources with highest return and least cost. The manifestation of this in the domain of financial issues was discussions cited about financing decisions and investment management. Investors, analyzers and other users of financial information attempt to achieve the best investment opportunity relating their accessible resources. Firms valuation is a tool which can contribute them in this respect. The obvious thing is that the higher the firm s value is the higher return will be gained by holders of capital. Due to importance of this issue, to date numerous researches have been conducted thereon and various methods have been introduced for the development and supplementation of firms valuation which attempt not to include the weak points of previous methods and rather to improve their strong points. Thus, many researchers and practitioners in accounting, particularly in recent decades, have involved in this domain and, also, in finding more applied and modern methods. Firms valuation with using cash flow has been allocated a special position in modern scientific accounting discussion. This is confirmed by researches efforts and presentation of new models in cash flows valuation aiming at supplementation and improvement of previous models and convenience in application. In new discussions of firms valuation, taking into consideration of the value and position of tax shield in calculating method, especially in those countries with efficient debt markets, is of particular importance. This, in turn, has made a range of firms valuation methods the advert point of all of which is the using of tax shield in calculations. One of the latest methods cited in this area is the Capital Cash Flow (CCF) method. This research aims at the representation of Capital Cash Flow method and demonstration of its effectiveness in Iran market through making comparison with Free Cash Flow and Adjusted present value methods. Literature Review Useful information builds the foundation of decisions made by people participating in capital market. Compilers of accounting standards attempt to provide financial reporting and accounting system of capital market data requirements. Therefore, analysis, investigation and, finally, using suitable methods resulting in fair and correct valuation, can lead to optimum allocation of capital resources and selection of investment opportunities. Numerous efforts have been taken by researches and practitioners in the field of various methods of firms valuation a compendium of which will be discussed below: Comparison of Various Firms Valuation Methods In a market-based valuation, Tham (2000) discounted Free Cash Flow at the weighted average cost of capital (WACC) and the effect of financing is taken into account by adjusting the WACC. He specified the following conditions for firms valuation: a. Multi-period investments and reinvestments, b. Finite cash flows, with variable growth rates, Business Intelligence Journal - July, 2010 Vol.3 No.2

2010 Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed 47 c. Variable debt-equity ratios, d. Losses carried forward. With the inclusion of these conditions, the analysis is more realistic. In this model, the present value of the tax shield is discounted at the required return with all-equity financing. Using this method, the impacts of inflation are directly incorporated into the analysis. In addition, the model shows that the NPV of the Free Cash Flow, discounted at the WACC, is equal to the NPV of the Free Cash Flow to the equity holder, discounted at the annually adjusted return to equity. The general approach applied by Tham can be easily modified to take into account the varied circumstances and complexities which are often encountered. Tham and X. Wonder (2002) argue that traditional formulas of WACC calculation would assume both debt and tax shield as risk-free. But even when the debt is risk-free, the tax shield can be risky. In addition, debt and tax shield can be both risky as well. In their survey, these two researches presented a non-conventional new WACC for a period with risky debt and tax shield and concluded formulas relevant to return to equity and debt. In contrast to preliminary formulas, in method introduced for calculating WACC, discount rate of tax shield is not limited to risk-free rate and rate of return on capital. They reviewed two conditions in their survey: 1. Risk-free tax shield and debt (conventional conditions) 2. Risky tax shield and debt In section one of research a new formula is presented for calculating WACC and Free Cash Flow and Capital Cash Flow in first condition; i.e. where the debt and the tax shield which are both risk-free are calculated and discounted at this rate. The obtained result shows that Capital Cash Flow is equal to Free Cash Flow plus tax shield. In section two, the same assumptions were reviewed for risky debt and tax shield and in a dichotomous model for a period the formulas relating to the discount rate of cash flows were concluded. During another survey, these two researchers used Free Cash Flow, Capital Cash Flow and Adjusted present value methods for the valuation of levered firms and tried to show that with using Miles and Ezell s model in calculation of tax shield, the three methods above will give similar responses. In Free Cash Flow method, the tax shield is obtained by using discount rate of the weighted average cost of capital. Capital Cash Flow method might directly add tax shield to the Free Cash Flow and the adjusted present value method would calculate it separately. In section one the assumptions were cited concerning three methods. In next section, with using dichotomous model for a five-year period the value of non-levered firms was calculated by those three methods mentioned above. And, in the final section of research, the value of tax shield was introduced in risk-free condition and, then, the value of levered firms was calculated through those three methods. Research results indicate that the value of levered firms increasingly depend upon the assumption relating to the discount rate of tax shield. With using dichotomous model for the calculation of Free Cash Flow and using Milles & Ezell s theory in tax shield calculation, it was shown that all three methods will give similar responses to levered firms valuation. Cooper & Nyborg (2006) propose the following four methods for firms valuation: Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange

48 Business Intelligence Journal July 1. Discounting operating Free Cash Flow at the weighted average cost of capital 2. Discounting equity Free Cash Flow at the cost of equity 3. Adjusted present value 4. Discounting the Capital Cash Flow at the unlevered cost of capital All above methods are based on a similar theory: levered firms value is equal to unlevered firms value plus present value of tax shield arising from financing due to debt. However, none of above methods can be defined without discount rate for valuation. These discount rates depend upon firm s leverage policy. The firm s leverage policy determines that what discount rate should be applied for the proper estimation of tax shield value and, consequently, firms value. Therefore, all valuation methods should start from a clear assumption about leverage policy of firm. In this survey, different hypotheses about levered firm s policy and that how they are affected by following factors are investigated: 1. Applicable discount rate 2. Present value of tax shield 3. Applicability of above methods Then, different valuation methods and the way to select from among them are explained. Lastly, through model presented by Booth (2002) and Fernandez (2004) it was shown that how using wrong methods will lead to mistakes which despite of their being small, they will have major impacts on calculations. Using wrong formulas can result in an estimation of the present value of tax shield which is very far from its correct value. In a survey, Fernandez took measures for firms valuation through four methods of: Discounting operating Free Cash Flow at the weighted average cost of capital; discounting equity Free Cash Flow at the cost of equity; discounting the Capital Cash Flow at the unlevered cost of capital; Adjusted present value. The research results indicated that firms valuation with using above four methods will give similar responses. This conclusion is logic as all of these methods analyze a similar fact with similar assumptions. These methods difference in institutions valuations is resulted from difference in tax shield calculation. Hence, their difference in term of various methods of tax shield calculation is presented below: Value of Tax Shield (VTS) Valuable researches have been conducted about cash flows valuation. Discrepancy among these methods and different theories on firms valuation using discounted cash flows is arising from difference in the calculation of tax shield. Interest paid on debt is a cost subtracted from profit but no tax is deducted for it, while tax is received on dividend or the accumulated profit dependent upon tax share. Thus, in presence of debt, total payments to the debt holders and shareholders will be higher. In this paper, different theories are presented for calculating present value of tax shield. Upon analysis of the results obtained from these theories it will be proved that VTS is not the present value of the tax shield discounted at a certain rate, rather it is the difference between two present values: present value of taxed paid in the unlevered company minus the present value of the taxes paid in the levered company. The Business Intelligence Journal - July, 2010 Vol.3 No.2

2010 Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed 49 taxes of the unlevered companies have a risk lower than that of the levered companies. In following section, some of the major researches and theories taken in this respect are presented: (1) Gordon & Shapiro [1956] The model developed by Gordon & Shapiro suggests that company s profit will grow in future by means of new investments. This growth rate will be varied in predictable periods and it will be constant and close to economic growth rate for periods onwards. (2) Modigliani and Miller [1963] They studied the effect of leverage on the firm s value. The results of their study indicated that in the absence of taxes, the firm s value is independent of its debts. But, in the presence of taxes, required return to equity will vary in proportion to the debt/capital ratio: D K = K + ( )(1 -T)( Ku-Kd) e u E E0 += V + DTD u 0 Where DT is the value of tax shield for the case of perpetuities. The goal of Modigliani and Miller was to show the impact of tax on the value of debt. In 1963, they used the following formulas for firms valuation: 1-TD @ WACC = Ku 6 E+ D ^Ku- Kdh WACCBT = Ku -DT; E ^E+ Dh In the last presented equation, Modigliani and Miller used book value instead of market value for calculating debt/total debt ratio and shareholders equity which is obviously wrong. (3) Myers [1974] Myers introduced the Adjusted Present Value (APV) method. According to Myers, the value of the levered firms is equal to the value of the firm with no interest (Vu) plus the present value of the tax shield. On the same basis, Mayers presented the following formula: VTS = PVK 6 d; TDKd@ He believes that the risk of tax saving due to debt is equal to the risk of the debt. In 1997, Luehrman also recommended that firms may be evaluated with using APV method and they can calculate tax shield based on Mayer s method where the firm s value is as the same as: PV = D+ E = Vu + VTS = PV6Ku; FCF@ + 6Kd; TDKd@ (4)Benninga and Sarig [1997] Benninga and Sarig claimed that in the presence of personal taxes (PT) in calculations, Tax advantages of debt should be discounted at discount rate after deduction of personal taxes. According to their theory: VTS = PVK 6 d^1 -TPDh; DK6 ^1-TPDh^1 -Th^1- TPAh@ @ (5) Arditti and Levy [1977] In their research results, Arditti and Levy explained that firms value may be calculated by Capital Cash Flow instead of Free Cash Flow. And, in this respect, it is necessary to discount the Capital Cash Flow at the weighted average cost of capital before tax (WACCBT). In 1977, they had a substantial Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange

50 Business Intelligence Journal July problem in their paper: for the calculation of Dt-1 Et-1 Et-1+ Dt-1 and E t-1+ D t-1 they used book value of the debt and shareholders equity instead of market value. (6) Miller [1977] Miller argues that the optimum debt structure of collective companies indicates the existence of such a structure for each of them individually. Thereafter, Miller introduces personal income tax and corporate income tax. According to Miller, firm s value when no debt is assumed is equal to: Vu = FCF( 1 - TPA) Ku Then he adds that firms attempts made for making increase in their debts is inconsistent with market balance. Increase in debts causes changes in rate of return on debt and rate of return to equity and, thus, firm s value under such conditions is independent of rate of debts. (7) Miller & Scholes [1978] When the rate of income tax is higher than rate of income on capital profit, most investors will have to pay taxes higher than their receivable dividend. Miller and Scholes conclude that if corporate repurchases its shares, it will make no preference between dividend and realized gain on capital. According to these researchers, firm value is independent of the policy of firm s dividend payment. (8) De Angelo and Masulis [1980] De Angelo and Masulis extended Miller s study. With considering that the tax final rate varies for different firms, they predict that firms, instead of using debt, try to reduce their taxes through other tools (e.g. depreciation). (9) Miles & Ezell [1980] According to Miles and Ezell, a firm D trying to have a constant ratio of E, should not use a valuation method similar to that used by a firm with default debt. In this respect, in firms with target debt ratio the Free Cash Flow will be discounted at the following rate: WACC K D KT d ( 1 Ku) = u - + 8 D E B; E + 1 + Kd E D FCFt KTD d t-1 t-1+ t-1= + Ku - g Ku - g (10) Miles & Ezell [1985] The following formula shows the relationship between the levered beta (βl) with the asset beta (βu) (assuming a riskfree debt and a debt beta of zero): D TRF bl = bu+ bu ; 1 - / E 1 + R E F (11) Chambers, Harris & Pringle [1982] This group of researchers compared four valuation methods for discounted cash flows: equity cash flow discounted at the required return to levered equity (Ke), Free Cash Flow discounted at WACC, Capital Cash Flow discounted at WACC before tax and Adjusted present value methods. They argue that in case of target debt the first three methods will give similar results. But, when there is no target debt, these methods will result in different values. Only the Adjusted present value will give the same results as other three methods under both conditions. Of course, firms are simply analyzed for one financial period. The reason of such result for their researches was a mistake: they had Business Intelligence Journal - July, 2010 Vol.3 No.2

2010 Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed 51 used book value instead of market value for D the ratio of E + D. (12) Harris and Pringle [1985] These two researchers suggest that the present value of the tax shield should be discounted at the required return to unlevered equity (Ku). VTS = PVK ( u; DKdT) Also in their calculations they consider that WACC before tax is equal to the required return to equity. Thus, in their opinion: WACC = Ku- DKT d /( D+ E) (13) Ruback [1995] Ruback uses the following formula to give β of corporate. b D E D L = bu 8 + - bd E B 8 E B (14) Tham & Valez-Pareja [2001] Following an arbitrage argument, Tham & Valez-Pareja believe that the appropriate discount rate for tax shields is Ku, the required return to unlevered equity. Of course, later it was shown that this approach also comes to mistakes. (15) Lewellen and Emery [1986] In general, Lewellen and Emery believed that Miles & Ezzell s is the most logically presented method until that time. But, in method introduced by Modigliani & Miler the tax shield was equal to: VTS = PVK 6 u; DTKu@ (16) Taggart [1991] In his researches, Taggart gives a summary of all valuation methods with or without concerning personal income tax. He suggests to use Miles & Ezzell s when the company adjusts to its target debt ratio once a year and Harris & Pringle s approach when the company continuously adjusts to its target debt ratio. (17) Damodaran [1991] If all the business risk is borne by the corporate, then the formula relating the levered beta (βl) with the asset beta (βu) will be as follows: b D L = bu+ ` bu ( 1 - T) E j According to Damodaran, identification of the beta of the debt under situations where it has been dropped is not the same as when the beta of the debt is assumed zero. When the beta of the debt is zero, the required return to debt should be the riskfree rate. The purpose of dropping of the beta of the debt is to obtain a higher levered beta. Another formula is presented below to show the relationship between levered beta (βl) and the asset beta (βu): b D E L = b U+ ` + E j We call this method the Practitioners Method. This method is used by financial consultants and investment institutions. According to this mehtod, given the same value for βu, a higher βl is obtained than according to Fernandez (2004) and according to Damodaran (1994). Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange

52 Business Intelligence Journal July (18) Inselbag and Kaufold [1997] They believe that in a case where monetary value of debt is fixed, the value of tax shield (VTS) may be given by Myers method. If the firm has a constant debt/value ratio, the value of tax shield (VTS) will be calculated through Miles and Ezell s. According to these researchers, present value of tax shield of firms planning based on amount of nominal debt is higher than firms emphasizing on debt ratio. This theory cannot be accepted for two reasons: firstly, no firm has output operating cash flow for having target debt ratio (instead of a target debt outstanding). And, secondly, as we know, the tax shield is the difference between two present values of taxes in levered and unlevered firms. Inselbag and Kaufold argue that the risk of target debt ratio is higher than that of having target debt outstanding. If so, the present value of taxes paid by levered firms should be higher than that of firms with target debt and, in consequence, the present value of tax shield for the second-group firms should be lower and this is opposed to the theory cited by above-mentioned researchers. (19) Copeland, Koller and Murrin [2000] The studies of this group of researches confirmed the theories of Harris & Pringle (1985) and Myers (1974) relating to present value of tax shield and they concluded that we leave it to the reader s judgment to decide which approach best fits his or her situation. (20) Fernandez [2001] This researcher believes that where the levered costs are zero, the value of tax shield is equal to tax rate multiplied by debt value. And, this value will be lower when levered costs exist. Research Design The objective of this research is to introduce Capital Cash Flow and to compare it with two methods of Free Cash Flow and Adjusted present value. Therefore, research variables are presented as follows: Studied Variables Three studied variables including Capital Cash Flow, Free Cash Flow and adjusted present value are introduced as follows: Capital Cash Flow Capital Cash Flow includes all cash flows paid or payable to investors. In this method, Capital Cash Flows are the cash flows available for all holders of the company s securities equivalent to the equity cash flow after deduction of company s assets tax. Capital Cash Flow is calculated as follows: CapitalCashFlow = Net Income + Depreciation- Capital exenditures p! 9 Working Capital+ Interest Net profit contains tax savings due to interest expense of debt. Then, the impact of cash flow adjustments including depreciation expense, capital expenditures and capital turnover are taken into account. At last, upon addition of cash interest, the Capital Cash Flow is obtained which indicates the after-tax cash flow for investors. For the same reason, it is discounted at the beforetax weighted average cost of capital which is calculated as follows: WACC = E K + D K V V AT e d Business Intelligence Journal - July, 2010 Vol.3 No.2

2010 Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed 53 Where D/V is the debt-to-value ratio; E/V is the equity-to-value ratio, and KD and KE are the respective expected debt and equity returns. On the other hand, capital assets pricing model (CAPM) should be used for calculating the required returns. K = R + b R K = R + b R e F e P e F e P Where R f is the risk-free rate, R p is the risk premium, K d and K e are the debt and equity betas, respectively. Free Cash Flow The basic assumption in determination of firm value with using Free Cash Flow is that a trading unit s value is resulted from its power in making the operating cash flow and other cash flows due to investment. This is calculated as follows: Free Cash Flow = earnings before interest and taxes+ estimated taxes + cash adjustments Since tax shield arising from interest expense of debt has not been taken into account in the calculation of Free Cash Flow, it is necessary to use the weighted average cost of capital after tax deduction. Where: WACC E K D AT = e+ K d( 1 - T ) V V T= effective tax rate Other components of this equation were represented before. present value. This method was introduced by Mayers and separates firm s value into two parts: unlevered operating cash flows and cash flows depending upon project financing. Where: APV FCF Int.( T) t n t n t c = / = 0 + / = 0 t 1 + Kg ( 1 - Kd) Int. t = expenseinterest ofdebt intimet Tc = effective income tax rate Other components of this equation were represented before. In this model, firm s value is initially calculated with using firm s capital expense in the absence of debt and, then, the present value of financing tax savings due to debt is added to it. The reason of this separation is to allow using different discount rates depending upon risk rate for two parts. Methodology of Research Considering the structure of hypotheses and the method used for data finding and collection within the finite time of research, statistical population was selected for three consecutive years from 2004 to 2006 from among companies listed on Tehran Stock Exchange. Cochran s (1977) sample size formula 1 was used for determining sample size of firms for stratified random sampling. Finally, 54 firms were selected as sample within three years of testing course. In next step, all data and information needed for calculating firm value by three represented methods were extracted from financial information existing in stock exchange, sites and other resources. Adjusted Present Value Method And, finally, the third method having been presented in this survey is the adjusted 1 n = NZ + Pq 2 2 Ne + ZPq Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange

54 Business Intelligence Journal July With considering the structure of survey hypotheses and the collected data, paired Student s t-test was applied for data analysis. Research Findings Research s First Hypothesis Testing Results of Student s t-test by SPSS statistics software concerning the first testable hypothesis are formulated in the following tables: Table 1. Paired samples Test for First Hypothesis Variables Mean Std. Deviation Paired Differences Std. Error Mean 95% Confidence Interval of the Difference Dower Upper t Df Sig. (2-tailed) CCF & FCF 0.016 0.15 0.2-0.39 0.42 0.82 53 0.935 Table2. Paired Samples Correlation Correlation N Variables 0.99 54 CCF & FCF Results show that there is a significant relationship up to level sig=0.935 between two variables of Capital Cash Flow and Free Cash Flow which is higher than level of 5%. On the other hand, the correlation between two variables is 0.99 indicating that two methods above are fully convergent and when one of them is increased the other will certainly increase and, also, with a decreased Capital Cash Flow the Free Cash Flow will also decrease. Also, as the upper and lower limit at 95% confidence level are 0.042 and 0.039, respectively, and the logarithmic difference of research variables is almost close to zero it may accept that hypothesis stating no difference between two methods of Capital Cash Flow and Free Cash Flow. Therefore, in general: Hypothesis H 0 is accepted. That is, α-level of 5%, using Capital Cash Flow method in the cash flows valuations would result in similar results of Free Cash Flow. Research s Second Hypothesis Testing Results of Student s t-test by SPSS statistics software concerning the second testable hypothesis are formulated in the following tables: Table 3. Paired samples Test for Second Hypothesis Variables Mean Std. Deviation Paired Differences Std. Error Mean 95% Confidence Interval of the Difference Dower Upper t Df Sig. (2-tailed) CCF & APV 0.76 0.89 0.12 0.032 0.16-0.63 53 0.530 Table 4. Paired Samples Correlation Variables N Correlation CCF & APV 54 0.996 Results show that there is a significant relationship up to level sig=0.530 between two variables of Capital Cash Flow and Adjusted present value which is higher than level of 5%. On the other hand, the correlation between two variables is 0.996 indicating that two methods above are fully convergent and when one of them is increased the other will certainly increase and, also, with a decreased Capital Cash Flow the Adjusted present value will also decrease. Also, as the upper and lower limit at 95% confidence level are 0.016 and 0.032, respectively, and the logarithmic difference Business Intelligence Journal - July, 2010 Vol.3 No.2

2010 Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed 55 of research variables is almost close to zero it may accept that hypothesis stating no difference between two methods of Capital Cash Flow and Adjusted present value. Therefore, in general: Hypothesis H 0 is accepted. That is, α-level of 5%, using Capital Cash Flow method in the cash flows valuations would result in similar results of adjusted present value. Summary and Conclusion To date various methods of firms valuation have been presented by researches and practitioners of financial issues, among which one can mention using discounted cash flows. The objective of this survey is to introduce Capital Cash Flow method for firms valuation and confirmation of its efficiency in Iran market through comparing it with two common methods available in market: Free Cash Flow and Adjusted present value. For the same purpose, 54 firms listed on Tehran Stock Exchange were selected as statistical sample. The required information and data were collected through stock exchange and other existing financial resources and sites and they were tested by paired Student s t-test. Test results showed that by using appropriate discount rate and considering the value of tax shield in calculations, the application of Capital Cash Flow in firms valuation would lead to the same results as those of two above-mentioned methods. Suggestions and Prospective of Future Researches Firms valuation with using discounted cash flows is an effective and extensive topic in financial decision making and investment opportunities which, in author opinion, has challenging aspects to be subject of further researches. There are numerous methods and models concerning firms valuation with using discounted cash flows none of which neither introduced in practice in Iran market nor tested in terms of applicability. It is even possible to analyze the efficiency of each of these models upon the market situations and the existing firms structure in term of financing method. In addition to discounted cash flows, there are other methods and models for firms valuation the comparison of which can also be subject of many future researches. In this survey, some theories about present value of tax shield are cited in brief. Determination of the value of tax shield in discussions on firms valuation is a very important issue to form the starting point for further researches. References Arditti, F.D. and H. Levy (1977), The Weighted Average Cost of Capital as a Cutoff Rate : A Critical Examination of the Classical Textbook Weighted Average,Financial Management (Fall),pp.24-34. Arzac, E.R. and L.R. Glosten (2005), A Reconsideration of Tax Shield Valuation, European Financial Management, forthcoming. Benninga, S. and O. H. Sarig (1997), Corporate Finance: A Valuation Approach. McGraw Hill. Booth, Laurence, 2007, Capital cash flow, APV & valuation, European financial management, Vol.13, No.1, pp 29-48 Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange

56 Business Intelligence Journal July Chambers, D.R., R.S. Harris and J.J. Pringle (1982), Treatment of Financing Mix in Analyzing Investment Opportunities, Financial Management (Summer), pp. 24-41. Copeland, T.E., T. Koller and J. Murrin (2000), Valuation: Measuring and Managing the Value of Companies. Third edition. New York: Wiley. Cooper, Jan and Nyborg, kjell, 2006, Consistent methods of valuing companies by DCF: Methods and assumptions, The paper available on the social science research network (SSRN) Damodaran, A. (1994), Damodaran on Valuation, John Wiley and Sons, New York. DeAngelo, L. and R. Masulis (1980), Optimal Capital Structure under Corporate and Personal Taxation, Journal of Financial Economics 8, March, pp. 3-29. Fernández, Pablo (2001), The correct value of tax shields. An analysis of 23 theories, Working Paper No. 276051, Social Science Research Network. Fernandez, Pablo (2002), Valuation Methods and Shareholder Value Creation. Academic Press, San Diego, CA. Fernandez, Pablo (2004), The Value of Tax Shields is NOT Equal to the Present Value of Tax Shields, Journal of Financial Economics (July), Vol. 73/1, pp. 145-165. Fernandez, Pablo, 2005, Financial literature about discounted cash flow valuation, IESE business schooluniversity of Navarro Fernandez, Pablo, 2007, Valuing companies by cash flow discounting: ten methods and nine theories, Emerald managerial finance, Vol.33, No.11, pp853-876 Fernandez, Pablo, 2007, Equivalence of the different discounted cash flow valuation methods. Different alternatives for determining the discounted value of tax shields and their implications for the valuation, IESE business schooluniversity of Navarro Gordon, Myron and E. Shapiro (1956), Capital Equipment Analysis: The Required Rate of Profit, Management Science, 3 (Oct.), pp. 102-110. Graham (2000), How Big Are the Tax Benefits of Debt?, Journal of Finance, Vol. LV, pp. 1901-1941. Graham (2001), Taxes and Corporate Finance: A Review, Working Paper, Duke University. Harris, R.S. and J.J. Pringle (1985), Risk- Adjusted Discount Rate Extensions form the Average-Risk Case, Journal of Financial Research (Fall), pp. 237-244. Inselbag, I. and H. Kaufold (1997), Two DCF Approaches for Valuing Companies under Alternative Financing Strategies (and How to Choose Between Them), Journal of Applied Corporate Finance (Spring), pp. 114-122.21 Kaplan, S. and R. Ruback (1995), The Valuation of Cash Flow Forecast: An Empirical Analysis, Journal of Finance, Vol. 50, No. 4, September. Business Intelligence Journal - July, 2010 Vol.3 No.2

2010 Mohsen Dastgir, Vali Khodadadi and Maryam Ghayed 57 Lewellen, W.G. and D.R. Emery (1986), Corporate Debt Management and the Value of the Firm, Journal of Financial Quantitative Analysis (December), pp. 415-426. Luehrman, Timothy A. (1997), What s It Worth: A General Manager s Guide to Valuation, and Using APV: A Better Tool for Valuing Operations, Harvard Business Review, (May-June), pp. 132-154 Massari, Mario and Roncaglio, Francesco and Zanetti, Laura, 2007, On the equivalence between APV and the WACC approach in a growing leveraged firms, European financial management, Vol.14, No.1, 2007, pp 152-162 Miles, J.A. and J.R. Ezzell (1980), The Weighted Average Cost of Capital: Perfect Capital Markets and Project Life: A Clarification, Journal of Financial and Quantitative Analysis (September), pp. 719-730. Miles, J.A. and J.R. Ezzell (1985), Reformulating Tax Shield Valuation: A Note, Journal of Finance, Vol. XL, 5 (December), pp. 1485-1492. Miller, M.H. (1977), Debt and Taxes, Journal of Finance (May), pp. 261-276. Miller, M. and F. Modigliani (1961), Dividend Policy, Growth and the Valuation of Shares, Journal of Business, 34, pp. 411-433. Miller, M. and M. Scholes (1978), Dividend and Taxes, Journal of Financial Economics (Dec.), pp. 333-364. Modigliani, F. and M. Miller (1958), The Cost of Capital, Corporation Finance and the Theory of Investment, American Economic Review, 48, pp. 261-297. Modigliani, F. and M. Miller (1963), Corporate Income Taxes and the Cost of Capital: A Correction, American Economic Review (June), pp. 433-443. Myers, S.C. (1974), Interactions of Corporate Financing and Investment Decisions Implications for Capital Budgeting, Journal of Finance (March), pp. 1-25. Ruback, Richard S. (1995), A Note on Capital Cash Flow Valuation, Harvard Business School, 9-295-069. Ruback, Richard S. (2002), Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows, Financial Management, Summer, pp. 85-103. Taggart, R.A., Jr. (1991), Consistent Valuation and Cost of Capital. Expressions With Corporate and Personal Taxes, Financial Management (Autumn), pp. 8-20. Tham, joseph and Wonder. X, 2002, Equivalence between FCF method, the CCF method and the APV approach, The paper available on the social science research network (SSRN) Dastgir M., Khodadadi V., Ghayed M. - Cash Flows Valuation Using Capital Cash Flow Method Comparing it with Free Cash Flow Method and Adjusted Present Value Method in Companies Listed on Tehran Stock Exchange

58 Business Intelligence Journal July Tham, joseph and Wonder. X, 2002, Nonconventional WACC with risky debt and risky tax shields, working paper available on the social science research network (SSRN) Tham, joseph, 2000, Practical equity valuation: A simple approach, Wp available on the social science research network (SSRN) Business Intelligence Journal - July, 2010 Vol.3 No.2