TCF approach

The T otal C ash F low approach is one of the discounted cash flow methods used in company valuation .

overview

The purpose of the discounted cash flow method consists in an exact (quantitative) determination of the tax advantage from a proportionate external financing. Now the amount of the tax benefit depends on the company's financing policy. In many cases, only a corporate tax (e.g. corporation tax or trade tax ) is assumed, the taxation of shareholders is neglected.

If it continues to be assumed that the company operates a so-called market- value- oriented financing (in the case of market- value- oriented financing, the future debt capital ratio for the entire future is already specified today . Deviations or other uncertainties are excluded), then the use of the TCF approach is appropriate (Total Cash Flow). The use of the TCF approach is tied to the requirement of a market value-oriented financing - if the company is financed differently than market value-oriented, then the correct company value will not match the TCF value.

In addition to the TCF approach, the FTE approach or the WACC equation can also be used. All three procedures lead to the same company value. Which of the three methods you use depends on what information the evaluator has. The TCF method assumes that the valuer knows the expected future cash flows as well as the average cost of capital. Both the WACC and FTE processes make different assumptions about this information.

equation

${\displaystyle V^{l}=\sum _{t=1}^{T}{\frac {E[FCF_{t}^{l}]}{(1+k_{0}^{d})\cdots (1+k_{t-1}^{d})}}}$

With:

• ${\displaystyle V^{l}}$ Value of the indebted company
• ${\displaystyle k_{t}^{d}}$ average cost of capital of the indebted company at time t
• ${\displaystyle E[FCF_{t}^{l}]}$ expected cash flows of the indebted company at time t