An Embarrassment of Riches: Winning Ways to Value with the WACC

Joseph Tham () and Ignacio Velez-Pareja ()

No 1974, Proyecciones Financieras y Valoración from Master Consultores

Abstract: There are many different ways to calculate the Weighted Average Cost of Capital (WACC) and for the beginner the plethora of possibilities may be very confusing. We present a general framework for classifying the WACCs that are applied to the FCF and the CCF. For the moment, we avoid complexities. To facilitate the discussion, we classify the menagerie of WACCs along three dimensions. We hope that the structured framework assists the reader in making the correct decision with respect to the calculation of the cost of capital in practice. First, we present a qualitative discussion on the dimensions of the framework. Second, we specify the appropriate formulas and calculations for the cells in the framework. At the outset, it is important to stress that this paper is concerned only with finite cash flows. In our judgment, it is best to discuss expressions for the cost of capital that are relevant to finite cash flows and this needs no further justification. In valuation, the continued use of cost of capital formulas (derived from cash flows in perpetuity), which are inappropriate for finite cash flows, is inexplicable and incomprehensible. From a practical point of view, free cash flows are derived from financial statements, which are not constructed in perpetuity. At best, expressions for the cost of capital that are derived from cash flows in perpetuity may be reasonable approximations for finite cash flows. At worst, the results could be misleading.

Keywords: multi-period WACC (search for similar items in EconPapers)
JEL-codes: D61 (search for similar items in EconPapers)
Pages: 13
Date: 2002-11-23
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=352180

Related works:
Journal Article: An Embarrassment of Riches: Winning Ways to Value with the WACC (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:col:000463:001974

Access Statistics for this paper

More papers in Proyecciones Financieras y Valoración from Master Consultores
Bibliographic data for series maintained by Ignacio Velez ().