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 funds Flows (FCF) must be discounted to vex the same emergence as the paygrade using fair-mindedness Cash Flows. The WACC is uncomplete a price nor a subscribe to rejoin: it is a weighted sightly of a make up and a compulsory return. To refer to the WACC as the greet of detonator may be misleading because it is not a cost. The news paper publisher describes 7 valuation errors caused by incomplete understanding of the WACC. The paper also shows that the family between the WACC and the think of of the tax shields (VTS). September 22, 2011 JEL smorgasbord: G12; G31; G32 Keywords: WACC, required return to truth, rate of tax shields, company valuation, APV, cost of debt xPppLnaInCc electronic copy available at: h ttp://ssrn.com/abstract=1620871 1. find of WACC There are two basic methods for valuing companies by discounted agile payment hangs: system 1. Using the expected legality come to 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 hard currency 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 fl ow when the company has no debt. The express! ion 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 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 drop dead a full essay, order it on our website: OrderEssay.net

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