IDEAS home Printed from https://ideas.repec.org/a/col/000129/003998.html
   My bibliography  Save this article

There exists circularity between WACC and value? Another solution

Author

Listed:
  • Ignacio Vélez-Pareja,

    ()

  • Julián Benavides-Franco

    ()

Abstract

Although we know there exists a simpleapproach to solve the circularitybetween value and the discount rate,known as the Adjusted Present Valueproposed by Myers, 1974, it seemsthat practitioners still rely on thetraditional Weighted Average Cost ofCapital, WACC approach of weightingthe cost of debt, Kd and the costof equity, Ke and discounting the FreeCash Flow, FCF. We show how to solvecircularity when calculating valuewith the free cash flow, FCF and theWACC. As a result of the solution wearrive at a known solution when weassume the discount rate of the tax savings as Ke, the cost of unleveredequity: the capital cash flow, CCF discountedat Ku. When assuming Kdas the discount rate for the tax savings,we find an expression for calculatingvalue that does not impliescircularity. We do this for a singleperiod and for N periods.

Suggested Citation

  • Ignacio Vélez-Pareja, & Julián Benavides-Franco, 2006. "There exists circularity between WACC and value? Another solution," ESTUDIOS GERENCIALES, UNIVERSIDAD ICESI, March.
  • Handle: RePEc:col:000129:003998
    as

    Download full text from publisher

    File URL: http://dspace.icesi.edu.co/dspace/bitstream/item/803/1/There_exists_circularity_between_WACC_and_value.pdf
    Download Restriction: no

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ignacio Vélez-Pareja, 2009. "Which Cost Of Debt Should Be Used In Forecasting Cash Flows?," ESTUDIOS GERENCIALES, UNIVERSIDAD ICESI, June.

    More about this item

    Keywords

    Firm valuation; cost of capital; cashflows; free cash flow; capital cash flow; WACC; circularity;

    JEL classification:

    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000129:003998. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Coordinador ICESI). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.