Share This Article:

Transversality and the Stochastic Nature of Cash Flows

Abstract Full-Text HTML XML Download Download as PDF (Size:342KB) PP. 755-769
DOI: 10.4236/me.2015.66072    2,489 Downloads   2,933 Views   Citations

ABSTRACT

We show that a transversality condition is necessary when it comes to valuing a company with an infinite lifespan. Without transversality the firm value cannot be uniquely determined. Also, an assumption on a lower bound of cash flows is necessary to achieve the desired result. We discuss four different stochastic cash flow processes and analyze to what extent the processes associated with these enterprise values satisfy the transversality condition.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

Kruschwitz, L. and Löffler, A. (2015) Transversality and the Stochastic Nature of Cash Flows. Modern Economy, 6, 755-769. doi: 10.4236/me.2015.66072.

References

[1] Williams, D. (1991) Probability with Martingales. Cambridge University Press, Cambridge.
http://dx.doi.org/10.1017/CBO9780511813658
[2] Dudley, R.M. (2002) Real Analysis and Probability. Cambridge University Press, Cambridge.
http://dx.doi.org/10.1017/CBO9780511755347
[3] Berk, J. and DeMarzo, P. (2014) Corporate Finance. 3rd Edition, Pearson, Boston.
[4] Brealey, R.A., Myers, S.C. and Allen, F. (2014) Principles of Corporate Finance. 11th Edition. McGraw-Hill, Irwin, New York.
[5] Copeland, T.E., Weston, J.F. and Shastri, K. (2005) Financial Theory and Corporate Policy. 4th Edition, Addison-Wesley, Boston.
[6] Ross, S.A., Westerfield, R.W. and Jaffe, J.F. (2013) Corporate Finance. 10th Edition, McGraw-Hill, Irwin, New York.
[7] Duffie, D. (1988) Security Markets: Stochastic Models. Academic Press, Boston.
[8] Cochrane, J.H. (2005) Asset Pricing. 2nd Edition, Princeton University Press, Princeton and Oxford.
[9] Cochrane, J.H. (2001) Asset Pricing. Princeton University Press, Princeton and Oxford.
[10] Kruschwitz, L. and Loffler, A. (1998) Unendliche Probleme bei der Unternehmensbewertung. Der Betrieb, 51, 1041-1043.
[11] Kruschwitz, L. and Loffler, A. (2003) Zur Bewertung ewig lebender Unternehmen mit Hilfe von DCF-Verfahren. Der Betrieb, 56, 1401-1402.
[12] Irle, A. (2005) Wahrscheinlichkeitstheorie und Statistik: Grundlagen, Resultate, Anwendungen. 2nd Edition, Teubner, Wiesbaden.
[13] Froot, K.A. and Obstfeld, M. (1991) Intrinsic Bubbles: The Case of Stock Prices. The American Economic Review, 81, 1189-1214.
[14] Myers, S.C. and Turnbull, S.M. (1977) Capital Budgeting and the Capital Asset Pricing Model: Good News and Bad News. The Journal of Finance, 32, 321-333.
http://dx.doi.org/10.1111/j.1540-6261.1977.tb03272.x
[15] Kruschwitz, L. and Loffler, A. (2006) Discounted Cash Flow: A Theory of the Valuation of Firms. Wiley, Chichester.
[16] Graham, J.R. and Kim, H. (2009) The Effects of the Length of the Tax-Loss Carryback Period on Tax Receipts and Corporate Marginal Tax Rates. National Tax Journal, 62, 413-427.
http://dx.doi.org/10.17310/ntj.2009.3.04
[17] Forstemann, T. (2012) Folgen freie Cashflows unverschuldeter Unternehmen einem rein (schwach) autoregressiven Prozess? In: Abhandlungen zu aktuellen Fragen der Finanzwirtschaft, Kovac, Hamburg, 81-242.
[18] Bhattacharya, S. (1978) Project Valuation with Mean-Reverting Cash Flow Streams. The Journal of Finance, 33, 1317-1331.
http://dx.doi.org/10.1111/j.1540-6261.1978.tb03422.x
[19] Fama, E.F. (1996) Discounting under Uncertainty. Journal of Business, 69, 415-428.
http://dx.doi.org/10.1086/209698

  
comments powered by Disqus

Copyright © 2019 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.