Revisiting WACC

α
Prof. S. K. Mitra
Prof. S. K. Mitra
α Institute of Management Technology, Nagpur, India

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Revisiting WACC

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Abstract

The paper compares classic WACC valuation method with equity cash flow and capital cash flow methods. As WACC method always use market values of debt and equity to determine weights, the method can give erroneous results whenever there are mismatches in the market valuation of debt. The tax-shield benefits are related to the actual interest amount that is based on the book value and therefore, the WACC computation method need to account tax shield benefits using book values. The paper used an example to compare valuation of a project using various valuation methods and found that the net present value obtained using modified version of the WACC, that used book value of debt to account tax shield, was comparable to other methods.

References

8 Cites in Article
  1. J Bierman (1993). Capital Budgeting in 1992: A Survey.
  2. P Fernandez (2003). Equivalence of Ten Different Methods for Valuing Companies by Cash Flow Discounting.
  3. Pablo Fernandez (2010). WACC: Definition, Misconceptions and Errors.
  4. J Graham,C Harvey (2001). The theory and practice of corporate finance: evidence from the field.
  5. P Kruger,A Landier,D Thesmar (2011). The WACC Fallacy: The Real Effects of Using a Unique Discount Rate.
  6. James Miles,John Ezzell (1980). The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification.
  7. F Modigliani,M Miller (1958). The Cost of Capital, Corporation Finance and the Theory of Investment.
  8. R Ruback (2002). Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows.

Funding

No external funding was declared for this work.

Conflict of Interest

The authors declare no conflict of interest.

Ethical Approval

No ethics committee approval was required for this article type.

Data Availability

Not applicable for this article.

How to Cite This Article

Prof. S. K. Mitra. 1969. \u201cRevisiting WACC\u201d. Global Journal of Management and Business Research - A: Administration & Management GJMBR-A Volume 11 (GJMBR Volume 11 Issue A11): .

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GJMBR Volume 11 Issue A11
Pg. 89- 95
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Crossref Journal DOI 10.17406/GJMBR

Print ISSN 0975-5853

e-ISSN 2249-4588

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The paper compares classic WACC valuation method with equity cash flow and capital cash flow methods. As WACC method always use market values of debt and equity to determine weights, the method can give erroneous results whenever there are mismatches in the market valuation of debt. The tax-shield benefits are related to the actual interest amount that is based on the book value and therefore, the WACC computation method need to account tax shield benefits using book values. The paper used an example to compare valuation of a project using various valuation methods and found that the net present value obtained using modified version of the WACC, that used book value of debt to account tax shield, was comparable to other methods.

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Revisiting WACC

Prof. S. K. Mitra
Prof. S. K. Mitra Institute of Management Technology, Nagpur, India

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