A Wrong Valuation Using WACC and the Right Solution
13 Pages Posted: 8 May 2020
Date Written: April 13, 2020
This paper presents a real valuation performed by a well-known investment bank, with two common errors and with two very different values for the equity of a firm:
a) €6,9 million calculating the Present Value of expected free cash flows (FCF) discounted with the WACC rate and then, subtracting the value of debt;
b) €4,2 million calculating the Present Value of expected equity cash flows (ECF) discounted with the Ke rate (required return to equity).
We identify the two main errors of the valuation of the investment bank and calculate the “right solution”: €5,9 million.
The paper also contains 210 answers and 56 comments from readers to the questions of the previous paper (The Most Common Error in Valuations using WACC https://ssrn.com/abstract=3512739 that did not contain the “right solution”.)
Keywords: company valuation; WACC; required return to equity; discounted cash flow; equity cash flows; free cash flows; tax shields
JEL Classification: G12, G31, M21
Suggested Citation: Suggested Citation