Will the Deflated WACC Please Stand Up? And the Real WACC Should Sit Down

Cuadernos Latinoamericanos de Administración, Vol. VI No. 12, Julio- Diciembre 2011

17 Pages Posted: 29 May 2010 Last revised: 15 Jul 2013

See all articles by Joseph Tham

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: May 29, 2010

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.

Keywords: Weighted Average Cost Of Capital, WACC, Firm Valuation, Capital Budgeting, Deflated WACC, Real WACC, Inflation

JEL Classification: D61, G31, H43

Suggested Citation

Tham, Joseph and Velez-Pareja, Ignacio, Will the Deflated WACC Please Stand Up? And the Real WACC Should Sit Down (May 29, 2010). Cuadernos Latinoamericanos de Administración, Vol. VI No. 12, Julio- Diciembre 2011. Available at SSRN: https://ssrn.com/abstract=1617669 or http://dx.doi.org/10.2139/ssrn.1617669

Joseph Tham (Contact Author)

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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