Valuation Methodology: A Comparison of the Weighted-Average Cost of Capital and Equity-Residual Approaches
11 Pages Posted: 12 Jun 2009
This technical note compares two methods of treating debt usage in discounted-cash-flow valuation of investment projects or companies. The note illustrates that the Weighted Average Cost of Capital approach (WACC) and the Equity Residual approach (ER) yield equivalent results if consistent assumptions are used. General features are illustrated with specific examples, including a LOTUS spreadsheet.
Keywords: financing, valuation
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