European Business Schools Librarian's Group
IESE Research Papers,
IESE Business School
No D/914: WACC: Definition, misconceptions and errors
Pablo Fernandez ()
Additional contact information
Pablo Fernandez: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
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
27 pages, March 1, 2011
Full text files
DI-0914-E.pdf
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