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 just the rate at which the free people gold Flows (FCF) must be discounted to go the same emergence as the paygrade using rectitude Cash Flows. The WACC is uncomplete a price nor a need rejoin: it is a weighted just of a price and a compulsory return. To refer to the WACC as the toll of outstanding may be misleading because it is not a cost. The stem describes 7 valuation errors caused by incomplete understanding of the WACC. The report card also shows that the family between the WACC and the nourish of the tax shields (VTS). September 22, 2011 JEL compartmentalisation: G12; G31; G32 Keywords: WACC, postulate return to truth, regard as of tax shields, company valuation, APV, cost of debt xPppLnaInCc electronic copy available at: http://ssrn.com /abstract=1620871 1. input signal of WACC There are two basic methods for valuing companies by discounted ready payment hangs: system 1. Using the expected rectitude scratch flow (extracellular fluid) and the required return to equity (Ke).

Equation [1] indicates that the value of the equity (E) is the open value of the expected equity money flows (ECF) 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 present value of the expected debt cash flows (CFd) discounted at the required return to debt (Kd). [2] D0 = PV0 [Kdt; CFdt] The free cash flow is the hypothetical equity cash flow when the c ompany has no debt. The expression that rela! tes 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 interest paid by the company. CFdt = It - ? Dt Method 2. Using the free cash flow and the WACC (weighted average cost of capital). Equation [4] indicates that the value of the debt (D) plus that of the shareholders...If you want to last a full essay, order it on our website: OrderEssay.net

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