WACC: Definition, Misconceptions, and Errors

BVResearch Pro
American Society of Appraisers Business Valuation Review™
Winter 2010 Volume 29, Issue 4 pp. 138-144
Pablo Fernández, PhD


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).
WACC: Definition, Misconceptions, and Errors
PDF, Size: 138 KB

Copyright American Society of Appraisers

The information contained in this product is based on content obtained by ASA from sources considered to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. BVR and ASA accept no liability for the use of such information which is provided "AS IS" and with no warranties, express or implied.