The Valuation Of Cash Flow Forecasts: An Empirical Analysis

A study compares the market value of highly leveraged transactions (HLT) to the discounted value of their corresponding cash flow forecasts. For a sample of 51 HLTs completed over the period 1983-1989, the valuation of discounted cash flow forecasts are within 10%, on average, of the market values of the completed transactions. These valuations perform at least as well as valuation methods using comparable companies and transactions. The study also inverts the analysis by estimating the risk premia implied by transaction values and forecast cash flows, and relating those risk premia to firm and industry betas, firm size, and firm book-to-market ratios.