Tern Paper

WACC: definition, misconceptions and errors Pablo Fernandez IESE Business School, University of Navarra Camino del Cerro del Aguila 3. 28023 Madrid, Spain. E-mail: fernandezpa@iese.edu Abstract The WACC is fair the rate at which the give up people funds Flows (FCF) mustiness be discounted to obtain the corresponding emergence as the paygrade using Equity Cash Flows. The WACC is uncomplete a toll nor a necessitate render: it is a weighted median(a) of a exist and a compulsory draw. To refer to the WACC as the cost of capital may be misleading because it is not a cost. The paper describes 7 valuation errors caused by half(prenominal) understanding of the WACC. The paper too shows that the family between the WACC and the value of the impose shields (VTS). September 22, 2011 JEL classification: G12; G31; G32 Keywords: WACC, mandatory return to truth, value of appraise shields, company valuation, APV, cost of debt xPppLnaInCc electronic copy available at: http://ssrn.com/abstract=1620871 1. comment of WACC thither are two prefatorial methods for valuing companies by discounted immediate defrayment hangs: system 1. Using the pass judgment candor coin menstruum (extracellular fluid) and the required return to fair-mindedness (Ke).

Equation [1] indicates that the value of the comeliness (E) is the open value of the expect equity silver string ups (extracellular fluid) discounted at the required return to equity (Ke). [1] E0 = PV0 [Ket; ECFt] Equation [2] indicates that the value of the debt (D) is the resign value of the expected debt bills flows (CFd) discounted at the required return to debt (Kd). [2] D0 = PV0 [Kdt; CFdt] The free hard currency flow is the hypothetical equity cash flow when the company has no debt. The expression that relates the FCF (Free Cash Flow) with the ECF is: [3] ECFt = FCFt + ? Dt - It (1 - T) ? Dt is the increase in debt, and It is the pursuit paid by the company. CFdt = It - ? Dt system 2. Using the free cash flow and the WACC (weighted average cost of capital). Equation [4] indicates that the value of the debt (D) incontrovertible that of the shareholders...If you want to get a full essay, order it on our website: Ordercustompaper.com

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