Summary for a research article-----Litreture review for the article Assignment - 1

Summary for a research article-----Litreture review for the article - Assignment Example The discount rate pertains to the â€Å"opportunity cost† or the anticipated rate of return as one invests on one option, instead of other comparative investments with similar risks (258). The most common discount rate employed is the Weighted Average Cost of Capital (WACC), which includes the risk of the cash flows. Second, some of the Income Valuation methods are â€Å"the capitalization of earnings or cash flows and the discount of future earnings or cash flows† (258). Capitalization is preferred when past operations can best indicate the businesses’ future operations (258). The discount of future earnings is more appropriate, when past operations do not reflect future cash flows (258). Some of the different cash flow methods used are: â€Å"Free Cash Flow, Capital Cash Flow and Equity Cash Flow† (259). Third, the Free Cash Flow (FCF) refers to what is left from the cash operations after tax is deducted and it does not consider the organization’s debt level, which means that it does not deduct interest expenses (259). For its valuation, the proper discount rate for Free Cash Flows is the after-tax Weighted Average Cost of Capital (WACCAT), which is computed by using the after-tax cost of debt in the WACC formula (259). Bunea-BontaÅŸ and Petre stress that the Free Cash Flow is a vital measure of the capability of the company to present positive returns to its shareholders. They note that one of the weaknesses of FCF is that since the capital structure of the company is continuously changing, this means that the computation for the WACC must be changed as well (260). Fourth, Capital Cash Flow (CCF) values the cash flow for all security holders of the company, including debts or shares (260). It adds all cash flows paid or can be paid to capital providers, by measuring all of the assets’ after-tax cash (260). CCF’s present value is equal to the value of the enterprise (260). It uses the