In the Weighted Average Cost of Capital (WACC) applied to the free cash flow (FCF), we assume that the cost of debt is the market, unsubsidized rate. With debt at the market rate and perfect capital markets, debt only creates value in the presence of taxes through the tax shield. In some cases,...

In this teaching note we show that using the findings of Tham and Velez-Pareja 2002, for finite cash flows, Ke and hence WACC depend on the discount rate that is used to value the tax shield, TS and as expected, Ke and WACC are not constant with Kd as the discount rate for the tax shield, even...

We discuss some ideas useful when forecasting financial statements that are based on historical data.The chapter is organized as follows: First we discuss the relevance of prospective analysis for non traded firms. In a second section we a basic reviews of subjects that will be needed for...

It is widely known that if the leverage is constant over time, then the cost of equity and the Weighted Average Cost of Capital (WACC) for the free cash flow, FCF, is constant over time. In other words, it is inappropriate to use a constant WACCFCF to discount the free cash flow (FCF) if the...

A typical approach for valuing finite cash flows is to assume that leverage is constant (usually as target leverage) and the cost of equity, Ke and the Weighted Average Cost of Capital, WACC are also assumed to be constant. For cash flows in perpetuity, and with the cost of debt, Kd as the...

In this teaching note I list some suggestions that might be useful to take into account when forecasting financial statements departing from historical data. The ideas presented in this note are the result of advising undergraduate and graduate students in the course Econ 195.96/295.96...

In this short note, we present a nontechnical retrospection on the unbearable longevity of the classic WACC (Weighted Average Cost of Capital) for the Free Cash Flow (FCF) in perpetuity. Over the past two decades, researchers in finance have increased greatly our understanding of the properties...

When calculating the Weighted Average Cost of Capital (WACC), the well-known textbook formula includes tax shields with the (1-T) factor affecting the contribution of debt to WACC. In this work we develop a procedure for properly calculating tax shields including the case when Losses Carried...

This paper presents three different approaches for calculating the levered annual values for a finite cash flow profile. In the first approach, we use K_U, the return to unlevered equity to calculate the annual tax savings and use K_U to calculate the (present) value of the tax savings. In the...

In a world with taxes, there is a small discrepancy between the deflated WACC WACCDef and the real wacc. This is due to the (1-T) term that is in the standard expression for the WACC applied to the Free Cash Flow (FCF). We compare different approaches for valuing nominal and real cash flows with...