William A. Sahlman

Harvard Business School (288023-PDF-ENG)

October 08, 1987

Examine some of the problems encountered when evaluating cash flow flows. A simple model is presented showing the effect of the value of modified assumptions on the appropriate discount rate, the level of profitability, the sales growth rate, the asset intensity index, and the leverage ratio. Help students address some of the following problems: 1) What is the definition of cash flow? 2) What effects do changes in the discount rate have on the valuation? 3) How sensitive is the value to changes in assumptions about the underlying characteristics of cash flow? 4) How does growth affect value? 5) How does the use of leverage affect value? 6) What are price / earnings ratios? and 7) What factors influence the price / earnings ratio?

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