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2006
- handle: 10670/1.seglnr
- 0123-5923
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Estudios Gerenciales
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Ignacio Vélez-Pareja et al., « There exists circularity between WACC and value? Another solution », Estudios Gerenciales, ID : 10670/1.seglnr
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Résumé
"Although we know there exists a simple approach to solve the circularity between value and the discount rate, known as the Adjusted Present Value proposed by Myers, 1974, it seems that practitioners still rely on the traditional Weighted Average Cost of Capital, WACC approach of weig-hting the cost of debt, Kd and the costof equity, Ke and discounting the Free Cash Flow, FCF. We show how to solve circularity when calculating value with the free cash flow, FCF and the WACC. As a result of the solution wearrive at a known solution when we assume the discount rate of the tax savings as Ke, the cost of unlevered equity: the capital cash flow, CCF discounted at Ku. When assuming Kdas the discount rate for the tax savings, we find an expression for calculating value that does not implies circularity. We do this for a single period and for N periods."