A Defense of the Classic FCF WACC: A Rejoinder to the Retrospection

7 Pages Posted: 28 Mar 2019

See all articles by Joseph Tham

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy; Academy of Public Administration under the President of the Republic of Kazakhstan

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Rauf Ibragimov

Russian Presidential Academy of National Economy and Public Administration

Date Written: March 18, 2019

Abstract

In this rejoinder, we note that the complaint against the classic FCF WACC is misplaced because it incorrectly identifies the real source of the problem. The fault for the discrepancies, dear colleagues, lies not in the classic formulation of the FCF WACC. The real reason for the discrepancies is more technical, subtle and nuanced. In the valuation of cash flows, the discrepancies in the results from the three methods are due to the inconsistency between the specification of the discount rate for the tax shield KTS and the corresponding expression for the return to levered equity KE. The results from all the methods will always match if the analyst uses the correct expression for KE that corresponds to the value of KTS.

Cautionary note: This rejoinder draws on and summarizes ideas that were discussed in regular, polite (?) emails between the authors; however key differences remain and need to be resolved. For the moment, this rejoinder represents the best (mis)understanding and interpretations of the fundamental concepts.

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

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

Suggested Citation

Tham, Joseph and Velez-Pareja, Ignacio and Ibragimov, Rauf, A Defense of the Classic FCF WACC: A Rejoinder to the Retrospection (March 18, 2019). Available at SSRN: https://ssrn.com/abstract=3354992 or http://dx.doi.org/10.2139/ssrn.3354992

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

Academy of Public Administration under the President of the Republic of Kazakhstan ( email )

Abay Street, 33a
Astana
Kazakhstan
+7 8 7172753422 (Phone)

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

Rauf Ibragimov

Russian Presidential Academy of National Economy and Public Administration ( email )

Vernadskogo Avenue,82
Moscow, Moscow region 119571
Russia
007 495 4347103 (Phone)
007 495 4349027 (Fax)

HOME PAGE: http://www.ranepa.ru/eng/

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