Goldilocks and the Three WACCs
11 Pages Posted: 23 Jun 2020
Date Written: May 29, 2020
Abstract
This paper presents three different approaches for calculating the levered annual values for a finite cash flow profile. In the first approach, we use KU, the return to unlevered equity to calculate the annual tax savings and use KU to calculate the (present) value of the tax savings. In the second approach, we use KD, the cost of debt to calculate the annual tax savings and use KU to calculate the (present) value of the tax savings. In the third approach, we use KD, the cost of debt to calculate the annual tax savings and the (present) value of the tax savings.
Keywords: Financial modeling, Valuation, Weighted Average Cost of Capital (WACC), Free Cash Flow (FCF)
JEL Classification: D61, H43, M21, M40, M46, G12, G31, G33
Suggested Citation: Suggested Citation