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A Note on the Weighted Average Cost of Capital WACC

Author

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  • Ignacio Velez-Pareja
  • Joseph Tham

Abstract

Most finance textbooks (See Benninga and Sarig, 1997, Brealey, Myers and Marcus, 1996, Copeland, Koller and Murrin, 1994, Damodaran, 1996, Gallagher and Andrew, 2000, Van Horne, 1998, Weston and Copeland, 1992) present the Weighted Average Cost of Capital WACC calculation as: WACC = d(1-T)D% + eE% (1) Where d is the cost of debt before taxes, T is the tax rate, D% is the percentage of debt on total value, e is the cost of equity and E% is the percentage of equity on total value. All of them precise (but not with enough emphasis) that the values to calculate D% y E% are market values. Although they devote special space and thought to calculate d and e, little effort is made to the correct calculation of market values. This means that there are several points that are not sufficiently dealt with: Market values, location in time, occurrence of tax payments, WACC changes in time and the circularity in calculating WACC. The purpose of this note is to clear up these ideas and emphasize in some ideas that usually are looked over. Also, some suggestions are presented on how to calculate, or estimate, the equity cost of capital.

Suggested Citation

  • Ignacio Velez-Pareja & Joseph Tham, 2000. "A Note on the Weighted Average Cost of Capital WACC," Proyecciones Financieras y Valoración 1926, Master Consultores.
    • Handle: RePEc:col:000463:001926
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    Citations

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    Cited by:

    1. Ignacio Vélez-Pareja & Rauf Ibragimov & Joseph Tham, 2008. "Constant Leverage And Constant Cost Of Capital: A Common Knowledge Half-Truth," Estudios Gerenciales, Universidad Icesi, June.
    2. Edlira Luçi & Llesh Lleshaj, 2016. "Assessment of the Capital Structure and Cost of Capital Using Financial Indicators, the Case of Large Businesses in Albania," European Journal of Multidisciplinary Studies Articles, Revistia Research and Publishing, vol. 1, January -.

    More about this item

    Keywords

    Weighted Average Cost of Capital;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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