The Use of Capital Cash Flow and an Alternate Formulation for Wacc with Foreign Currency Debt
19 Pages Posted: 9 Jun 2003
Date Written: May 2, 2003
In this note we show with a simple example the proper way to use the adjusted WACC , the Cash Flow to Equity and the Capital Cash Flow, CCF to calculate the levered value of a firm when it has debt in foreign currency (FC). In this note we assume we are valuating the firm in the context of the domestic currency. We calculate the levered value of a firm using four approaches: the WACC for the Free Cash Flow, FCF, the adjusted WACC (that takes into account the tax savings, TS in absolute terms), the Capital Cash Flow discounted with the unlevered cost of equity and the independent calculation of the levered equity. Except for the calculation with CCF, all of them have to solve the circularity that arises between the cost of capital and the levered value. All the approaches match. However, the WACC for FCF takes into account the effect of tax savings through the factor (1-T) and the other approaches need to consider not only the tax savings related to the interest charges, but the tax savings associated with the losses in exchange for the debt.
Keywords: Weighted Average Cost of Capital, WACC, Capital Cash Flow, CCF, firm valuation, capital budgeting, equity cost of capital, foreign exchange, purchasing parity power, cost of debt, tax shield, tax savings.
JEL Classification: D61, G31, G12, D92
Suggested Citation: Suggested Citation