Reconciling DCF Valuation Methodologies.

The finance literature includes four common methods to value a corporation using discounted cash flows: 1) adjusted present value, 2) capital cash flows, 3) cash flows to equity, and 4) free cash flows to the firm. Significant inconsistencies occur in the valuation literature because the literature tends to associate a particular method with a specific debt rebalancing policy. Moreover, this association is made inconsistently among researchers. We demonstrate that each of the valuation methods can be adjusted appropriately for a firm that rebalances its debt, and we indicate how to adjust them to incorporate leverage. When the debt rebalancing policy is applied consistently, all valuation methods produce equivalent results.