The Unbearable Longevity of the Classic Free Cash Flow (FCF) WACC: A Nontechnical Retrospection

Abstract

In this short note, we present a nontechnical retrospection on the unbearable longevity of the classic WACC (Weighted Average Cost of Capital) for the Free Cash Flow (FCF) in perpetuity. Over the past two decades, researchers in finance have increased greatly our understanding of the properties of the WACC. This means that the usefulness of the classic FCF WACC has long expired. However, inexplicably, it continues to live on in textbooks and websites. The resilience of the classic FCF WACC is puzzling. We discuss some unsatisfactory reasons why the classic FCF WACC continues to thrive.

Keywords: Weighted Average Cost of Capital (WACC), Free Cash Flow (FCF)

JEL Classification: D61, H43, M21, M40, M46, G12, G31, G33