Revisiting WACC

Abstract

The paper compares classic WACC valuation method with equity cash flow and capital cash flow methods. As WACC method always use market values of debt and equity to determine weights, the method can give erroneous results whenever there are mismatches in the market valuation of debt. The tax-shield benefits are related to the actual interest amount that is based on the book value and therefore, the WACC computation method need to account tax shield benefits using book values. The paper used an example to compare valuation of a project using various valuation methods and found that the net present value obtained using modified version of the WACC, that used book value of debt to account tax shield, was comparable to other methods.