justtheequityinvestorsinthebusinessandarethusafterall
cashflowsassociatedwithdebt(interestpayments,principal
payments,newdebtissues).Dividendsrepresentone easily
observablemeasureofthesecashflows,butamoreexpansive
definition of cash flows to equity can be computed as follows:
Thecash flowstothefirmarecashflowsgeneratedforall
claim holders in the firm and are predebt cash flows.
Notethatbothofthesecashflowsareaftertaxesand after
reinvestmentneedshavebeencovered,andarethusfree(for
withdrawal from the firm).
Thesecondwaytocategorizecashflowsisintonominaland
real cash flows. Nominal cash flows incorporate expected
inflation and consequently have to be in a specific
currency—dollars, euros, pesos, or yen, for instance. The
expected inflation will vary across currencies, leading to
differentestimatesofcashflowsineach.Realcashflowsdo
not havean expected inflationcomponent and thus reflect
changes in the number of units sold and real pricing power.
Thethirdwayistodifferentiatebetweenpretaxandafter-tax
cash flows.Thecash flowsto thefirmand equitythat we
definedearlierareaftercorporate taxesbut beforeinvestor
taxes: Stockholders have to pay taxes on dividends and
capitalgainsandbondholdersoninterestreceived.Thesecash