A Wrong Valuation Using WACC and the Right Solution

13 Pages Posted: 8 May 2020

Date Written: April 13, 2020

Abstract

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

Fernandez, Pablo, A Wrong Valuation Using WACC and the Right Solution (April 13, 2020). IESE Business School Working Paper No. WP-1249-E, Available at SSRN: https://ssrn.com/abstract=3574850 or http://dx.doi.org/10.2139/ssrn.3574850

Pablo Fernandez (Contact Author)

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

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