CASH = CASH ?      CASH = KING?     WHERE?    WHEN?
Discounted cash-flow methods use different implicit cash-definitions. Under the banner ¨cash = king¨ this leads to convincing but entirely different valuation results. This might be applied dependent upon where and when. We illustrate this hereunder(1)

Let us assume a company with an everlasting fixed profit after tax of DM 100 and full payout of 100% in the form of dividends to shareholders requiring a WACC after tax of 10%. In all financial markets this company would be valued at 1000, being the perpetuity of 100 discounted at 10%. Keeping things simple requires zero in vestments and zero depreciation and a simple finance structure of equity DM 1000, working capital DM 0 and no debt.. All valuation methods would value this company at DM 1000. Also free cash-flow theory would valuate this company at DM 1000 in most countries except Germany. 

The reason is the German "Anrechnungsverfahren" which up to now still forms an essential part of the German tax structure.  As a result the "anrechenbare" Company Tax is positively included in free cash-flow.  As a result free cash-flow in our example above would be calculated at 142,9(2). Free cash-flow valuation at a WACC of 10% after tax would value this company at 1429 minus 0.0 debt=1429. With a ten year horizon, free cash-flow valuation means summing net present values  as illustrated in the table beneath.: 

 + 10 years free cash-flow of 142,9 at 10% = +     878,06
  + continuing value end year 10 of 1429 = +     550.94
 - interest bearing debt zero = -         0.00
Thus, free cash-flow valuation would result in = +  1,429.00
Standard cash-flow valuation continues to valuate at 1000. Also financial markets would continue considering this company equivalent to a 10% perpetuity bond, worth 1000 if discounted at 10%. 

What happens to a buyer financing this deal bought at 1427 with a WACC of 10% after tax and selling end year 10 at 1427(if ever). This is shown with the following buyer's cash-in/cash-out survey(3)

- buyers cash-out of buying price start year 1 = - 1,429
- 10 year WACC charges of 10% after tax on 1,427 = - 1,429
+ 10 years net profits of 100 at 10% after tax = + 1,000
+ sales proceeds end year 10 of 1429 = + 1,429
Of course, buyer's sad net (cash) loss in year 10 =   -   429
This simple cash-in/cash-out survey demonstrates that informed sellers in Germany (4)should be inclined valuing with the free cash- flow method.  They are however other reasons that dampen this substantial side effect of free cash-flow valuation.  An important dampening reason is the presence of some debt.  More explaining does not fall within the scope of this summary. 

Buyers should prefer standard discounted cash-flow methods rather than free cash-flow. Valuators and analysts using EVA or CFROI, should be aware of these phenomena of applying what, where, when. A more academic approach of these phenomena and a solution can be found at: In this site's home-page, valuation software (free demo) can be downloaded with a survey of all cash-flow methods including free cash-flow. 

A more academic approach of these phenomena might be found by clicking here. 

By clicking here to find this site's home-page, valuation software (free demo) can be downloaded with a survey of all cash-flow methods including free cash-flow.

A solution of the confounding problem of what, where and when may be found in the  help-file of this valuation software by using properly the most classic discounted cash-flow valuation techniques, using pay-back methods. 

NOTE 1. Corneel B.A. Spil, manager Finiconsult B.V., Netherlands, e-mail:

NOTE 2. Supposing full pay-out with a corresponding 30% marginal tax rate on dividends and "Gewerbesteuer" 20%, the calculation is:
+ 100  = Net Profit (i.e 100/70*100/80=DM178,57 gross profit) 
+   0  = Interest(0)-Taxshield ([0,3x(0,8xDM0)+o,2xDM0]=DM0)
+ 42,9 ="Anrechenbare" Company Tax (0,3X0,8xDM178,57=DM42,86).
 142,9 =total free cash-flow
NOTE 3. Make not the mistake to calculate present values of each line; interest was already taken care of in line 2 with 10%.

NOTE  4. But not outside Germany where the specific tax structure of ' anrechenbare Körperschaftsteuer' does not exist and free cash-flow valuation generally leads to lower outcomes. See free-cash-flow.htm