Business valuation expert witness Dr. Kamin bases his philosophy on the teaching of Professor Merton Miller of the University of Chicago Graduate School of Business, 1990 Nobel Prize in economics for his pioneering work in the economic theory of valuation and corporate finance. Dr. Kamin writes:
Professor Miller’s teaching has imbued the entire field of business valuation for both public and private companies. His teaching led to the phrase “free cash flow” to describe the source of the economic benefit to shareholders that is the basis for attribution of value to share ownership. Free cash flow is the cash withdrawable from a business after allowing for capital needed for reinvestment to support the firm’s growth opportunities.
Professor Miller’s premise is that the only economically rational basis for valuing a business enterprise is the aggregate current value of all future free cash flows distributable by the firm. Each future year’s cash flow has a present price per dollar that reflects the time-value of money and the compensation for risk bearing to the future date. The economically rational value of the business firm is then the price per dollar of each year’s future free cash flow multiplied by the number of dollars of future free cash flow summed up over all the future years in which free cash flow is expected to be generated.