Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC
Most finance textbooks present the Weighted Average Cost of Capital (WACC) calculation as: WACC = Kd×(1-T)×D% + Ke×E%, where Kd is the cost of debt before taxes, T is the tax rate, D% is the percentage of debt on total value, Ke is the cost of equity and E% is the percentage of equity on total value...
- Autores:
-
Vélez-Pareja, Ignacio
Tham, Joseph
- Tipo de recurso:
- Fecha de publicación:
- 2009
- Institución:
- Universidad Tecnológica de Bolívar
- Repositorio:
- Repositorio Institucional UTB
- Idioma:
- eng
- OAI Identifier:
- oai:repositorio.utb.edu.co:20.500.12585/12384
- Acceso en línea:
- https://hdl.handle.net/20.500.12585/12384
- Palabra clave:
- Tax Shield;
Firm;
Discounted Cash Flow
LEMB
- Rights
- openAccess
- License
- http://creativecommons.org/licenses/by-nc-nd/4.0/
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Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC |
| title |
Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC |
| spellingShingle |
Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC Tax Shield; Firm; Discounted Cash Flow LEMB |
| title_short |
Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC |
| title_full |
Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC |
| title_fullStr |
Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC |
| title_full_unstemmed |
Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC |
| title_sort |
Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC |
| dc.creator.fl_str_mv |
Vélez-Pareja, Ignacio Tham, Joseph |
| dc.contributor.author.none.fl_str_mv |
Vélez-Pareja, Ignacio Tham, Joseph |
| dc.subject.keywords.spa.fl_str_mv |
Tax Shield; Firm; Discounted Cash Flow |
| topic |
Tax Shield; Firm; Discounted Cash Flow LEMB |
| dc.subject.armarc.none.fl_str_mv |
LEMB |
| description |
Most finance textbooks present the Weighted Average Cost of Capital (WACC) calculation as: WACC = Kd×(1-T)×D% + Ke×E%, where Kd is the cost of debt before taxes, T is the tax rate, D% is the percentage of debt on total value, Ke is the cost of equity and E% is the percentage of equity on total value. All of them precise (but not with enough emphasis) that the values to calculate D% y E% are market values. Although they devote special space and thought to calculate Kd and Ke, little effort is made to the correct calculation of market values. This means that there are several points that are not sufficiently dealt with: Market values, location in time, occurrence of tax payments, WACC changes in time and the circularity in calculating WACC. The purpose of this note is to clear up these ideas, solve the circularity problem and emphasize in some ideas that usually are looked over. Also, some suggestions are presented on how to calculate, or estimate, the equity cost of capital. © 2009 Mackenzie Presbyterian University. All rights reserved. |
| publishDate |
2009 |
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2009 |
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2023-07-21T20:48:57Z |
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2023-07-21T20:48:57Z |
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2023 |
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Vélez-Pareja, I., & Tham, J. (2009). Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC. RAM. Revista de Administração Mackenzie, 10, 101-131. |
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https://hdl.handle.net/20.500.12585/12384 |
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10.1590/S1678-69712009000600007 |
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Universidad Tecnológica de Bolívar |
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Repositorio Universidad Tecnológica de Bolívar |
| identifier_str_mv |
Vélez-Pareja, I., & Tham, J. (2009). Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC. RAM. Revista de Administração Mackenzie, 10, 101-131. 10.1590/S1678-69712009000600007 Universidad Tecnológica de Bolívar Repositorio Universidad Tecnológica de Bolívar |
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https://hdl.handle.net/20.500.12585/12384 |
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eng |
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eng |
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Attribution-NonCommercial-NoDerivatives 4.0 Internacional |
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30 páginas |
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Cartagena de Indias |
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Revista de Administracao Mackenzie |
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Vélez-Pareja, Ignacio7820b0cc-5263-4237-96bd-57076aa0af70Tham, Joseph784a5e55-92c2-4048-8a7c-441bbd9dade82023-07-21T20:48:57Z2023-07-21T20:48:57Z20092023Vélez-Pareja, I., & Tham, J. (2009). Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC. RAM. Revista de Administração Mackenzie, 10, 101-131.https://hdl.handle.net/20.500.12585/1238410.1590/S1678-69712009000600007Universidad Tecnológica de BolívarRepositorio Universidad Tecnológica de BolívarMost finance textbooks present the Weighted Average Cost of Capital (WACC) calculation as: WACC = Kd×(1-T)×D% + Ke×E%, where Kd is the cost of debt before taxes, T is the tax rate, D% is the percentage of debt on total value, Ke is the cost of equity and E% is the percentage of equity on total value. All of them precise (but not with enough emphasis) that the values to calculate D% y E% are market values. Although they devote special space and thought to calculate Kd and Ke, little effort is made to the correct calculation of market values. This means that there are several points that are not sufficiently dealt with: Market values, location in time, occurrence of tax payments, WACC changes in time and the circularity in calculating WACC. The purpose of this note is to clear up these ideas, solve the circularity problem and emphasize in some ideas that usually are looked over. Also, some suggestions are presented on how to calculate, or estimate, the equity cost of capital. © 2009 Mackenzie Presbyterian University. All rights reserved.30 páginasapplication/pdfenghttp://creativecommons.org/licenses/by-nc-nd/4.0/info:eu-repo/semantics/openAccessAttribution-NonCommercial-NoDerivatives 4.0 Internacionalhttp://purl.org/coar/access_right/c_abf2Revista de Administracao MackenzieMarket value calculation and the solution of circularity between value and the weighted average cost of capital WACCinfo:eu-repo/semantics/articleinfo:eu-repo/semantics/drafthttp://purl.org/coar/resource_type/c_6501http://purl.org/coar/version/c_b1a7d7d4d402bccehttp://purl.org/coar/resource_type/c_2df8fbb1Tax Shield;Firm;Discounted Cash FlowLEMBCartagena de IndiasBenninga, S.Z., Sarig, O.H. (1997) Corporate Finance: A Valuation Approach. Cited 62 times. New York: McGraw-HillBrealey, R.A., Myers, S.C., Marcus, A.J. (2004) Fundamentals of Corporate Finance 4th Ed. Cited 349 times. New York: McGraw-HillCotner, J.S., Fletcher, H.D. Computing the cost of capital for privately held firms (2000) American Business Review, 18 (2), pp. 27-33. Cited 12 times.Fernández, P. Equivalence of the different discounted cash flow valuation methods. Different alternatives for determining the discounted value of tax shields and their implications for the valuation (1999) Social Science Research Network Working paperHamada, R.S. PORTFOLIO ANALYSIS, MARKET EQUILIBRIUM AND CORPORATION FINANCE (1969) The Journal of Finance, 24 (1), pp. 13-31. Cited 265 times. doi: 10.1111/j.1540-6261.1969.tb00339.xHarris, R.S., Pringle, J.J. RISK‐ADJUSTED DISCOUNT RATES‐EXTENSIONS FROM THE AVERAGE‐RISK CASE (1985) Journal of Financial Research, 8 (3), pp. 237-244. Cited 80 times. doi: 10.1111/j.1475-6803.1985.tb00406.xModigliani, F., Miller, M.H. The cost of capital, corporation taxes and the theory of investment (1958) The American Economic Review, 48, pp. 261-297. Cited 7118 times.Myers, S.C. INTERACTIONS OF CORPORATE FINANCING AND INVESTMENT DECISIONS—IMPLICATIONS FOR CAPITAL BUDGETING (1974) The Journal of Finance, 29 (1), pp. 1-25. Cited 292 times. doi: 10.1111/j.1540-6261.1974.tb00021.xRuback, R.S. Capital cash flows: A simple approach to valuing risky cash flows (2002) Financial Management, 31 (2), pp. 85-103. Cited 105 times. www.interscience.wiley.com/jpages/0046-3892 doi: 10.2307/3666224Tham, J. (1999) Present Value of the Tax Shield: A Note Harvard Institute of International Development Working, paper n. 695, April, Disponível em http://ssrn.com/abstract=203868Practical equity valuation: A simple (2000) Social Science Research Network Disponível em http://ssrn.com/abstract=233825Tham, J., Vélez-Pareja, I. An embarrassment of riches: Winning ways to value with the WACC (2002) Social Science Research Network. Cited 4 times. Disponível em http://ssrn.com/abstract=352180Tham, J., Vélez-Pareja, I. Principles of Cash Flow Valuation: An Integrated Market-Based Approach (2004) Principles of Cash Flow Valuation: An Integrated Market-Based Approach, pp. 1-487. Cited 12 times. http://www.sciencedirect.com/science/book/9780126860405 ISBN: 978-012686040-5 doi: 10.1016/B978-0-12-686040-5.X5000-XVélez-Pareja, I., Burbano-Pérez, A. Consistency in valuation: A practical guide (2010) Academia Revista Latinoamericana de Administracion, (44), pp. 21-43. 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