WACC: Definition, misconceptions and errors

Preprint OPEN
Fernandez, Pablo;
  • Subject: required return to equity; value of tax shields; company valuation; cost of debt;
    • jel: jel:G12 | jel:G31 | jel:M21

The WACC is just the rate at which the Free Cash Flows must be discounted to obtain the same result as in the valuation using Equity Cash Flows discounted at the required return to equity (Ke) The WACC is neither a cost nor a required return: it is a weighted average of... View more
  • References (17)
    17 references, page 1 of 2

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    Fernández, P. (2002), “Valuation Methods and Shareholder Value Creation,” Academic Press.

    Fernández, P. (2007), “A More Realistic Valuation: APV and WACC with constant book leverage ratio,” Journal of Applied Finance, Fall/Winter, Vol.17, No 2, pp. 13-20.

    Fernández, P. (2009), “Valuing Companies by Cash Flow Discounting: 10 Methods and 9 Theories,” Downloadable from http://ssrn.com/abstract=256987 Harris, R.S. and J.J. Pringle (1985), “Risk-adjusted discount rates extensions from the averagerisk case,” Journal of Financial Research, 8, pp. 237-244.

    Inselbag, I. and H. Kaufold (1997), “Two DCF Approaches for Valuing Companies under Alternative Financing Strategies and How to Choose between Them,” Journal of Applied Corporate Finance, 10, pp. 114-122.

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