IDEAS home Printed from https://ideas.repec.org/p/col/000463/007072.html
   My bibliography  Save this paper

Will the deflated WACC please stand up? And the real WACC should sit down

Author

Listed:
  • Joseph Tham

    ()

  • Ignacio Velez Pareja

    ()

Abstract

In a world with taxes, there is a small discrepancy between the deflated WACC WACCDef and the real wacc. This is due to the (1-T) term that is in the standard expression for the WACC applied to the Free Cash Flow (FCF). We compare different approaches for valuing nominal and real cash flows with the 1) nominal Weighted Average Cost of Capital, WACC, 2) real WACC, wacc, 3) inflated WACC, WACCInf and 4) deflated WACC, WACCDef. The cash flows are derived from financial statements that have been constructed in nominal prices. For consistency in valuation, we must use the deflated WACC rather than the real WACC to discount real cash flows, and the nominal WACC to discount nominal cash flows.

Suggested Citation

  • Joseph Tham & Ignacio Velez Pareja, 2010. "Will the deflated WACC please stand up? And the real WACC should sit down," PROYECCIONES FINANCIERAS Y VALORACION 007072, MASTER CONSULTORES.
  • Handle: RePEc:col:000463:007072
    as

    Download full text from publisher

    File URL: http://ssrn.com/abstract=1617669
    Download Restriction: no

    More about this item

    Keywords

    Weighted average cost of capital; WACC; firm valuation; capital budgeting; deflated WACC; real WACC; inflation;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

    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:000463:007072. 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: (Ignacio Velez). 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.