WACC: Definition, misconceptions and errors

Pablo Fernandez

No D/914, IESE Research Papers from IESE Business School

Abstract: 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 a cost and a required return. To refer to the WACC as the "cost of capital" may be misleading because it is not a cost. The paper includes 7 errors due to not remembering the definition of WACC and shows the relationship between the WACC and the value of the tax shields (VTS).

Keywords: required return to equity; value of tax shields; company valuation; cost of debt (search for similar items in EconPapers)
JEL-codes: G12 G31 M21 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2011-03-01
New Economics Papers: this item is included in nep-acc and nep-cfn
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Citations: View citations in EconPapers (1)

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