A Cash-Flow Theory of Stock Valuation

This article introduces a theory of stock valuation based on cash-flow analysis to price stocks, where the cash receipts and the cash payments of the firm is projected for each time period for ever where a continuous adjustment of the variables affecting the discounted present value of the cash-flow stream will show its effect on the value of the company's stock. Not only does this starting point by-pass certain measurement problems, but it also direct attention to the relevant variables in a manner that other approaches may not. The financial manager is now required to generate a cash-flow net not only to satisfy the explicit cost but also the implicit cost of the providers of funds in order to create value. And to determine the optimal cash balance that minimizes the opportunity cost and maximizes shareholders' wealth. 1. Purpose The purpose of this study is to show that the whole financial system is becoming a Cash-flow system where a continuous adjustment of the variables affecting the discounted present value of the cash-flow stream will show its effect on the value of the company's stock. Our Financial System would react to the cash-flow and corporation reacts to what investors react and vice versa. All investors operate on time value of money. From here rises a cash flow concept of profit associated with the cash-flow theory of stock valuation. This theory of stock valuation is based on the assumption that the cash receipts and the cash payments of the firm have been projected for each time period for ever. So, we should live day per day this reality in order to operate in the future. And the whole financial system would become a Cash-flow system where a continuous adjustment on hour per hour, day per day of the variables affecting the discounted present value of the cash-flow stream will show its effect on the value of the company's stock. A careful definition of cash flows and a theory of stock pricing based on cash-flow analysis is required because previous discussions have been concerned with investment decisions rather than stock pricing. They have therefore been concerned with the cash flow associated with a particular investment project, rather than with the flows to the firm as a whole, and we must recognize the possibility that cash flows generated by one project will be used to finance another project.