Market value calculation and the solution of circularity between value and the weighted average cost of capital WACC

Detalhes bibliográficos
Autor(a) principal: Vélez-Pareja,Ignacio
Data de Publicação: 2009
Outros Autores: Tham,Joseph
Tipo de documento: Artigo
Idioma: eng
Título da fonte: RAM. Revista de Administração Mackenzie
Texto Completo: http://old.scielo.br/scielo.php?script=sci_arttext&pid=S1678-69712009000600007
Resumo: 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.
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spelling Market value calculation and the solution of circularity between value and the weighted average cost of capital WACCWeighted average cost of capitalFirm valuationCapital budgetingEquity cost of capitalMarket valueMost 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.Editora MackenzieUniversidade Presbiteriana Mackenzie2009-12-01info:eu-repo/semantics/articleinfo:eu-repo/semantics/publishedVersiontext/htmlhttp://old.scielo.br/scielo.php?script=sci_arttext&pid=S1678-69712009000600007RAM. Revista de Administração Mackenzie v.10 n.6 2009reponame:RAM. Revista de Administração Mackenzieinstname:Universidade Presbiteriana Mackenzie (UPM)instacron:MACKENZIE10.1590/S1678-69712009000600007info:eu-repo/semantics/openAccessVélez-Pareja,IgnacioTham,Josepheng2010-08-03T00:00:00Zoai:scielo:S1678-69712009000600007Revistahttps://www.scielo.br/j/ram/https://old.scielo.br/oai/scielo-oai.phprevista.adm@mackenzie.br1678-69711518-6776opendoar:2010-08-03T00:00RAM. Revista de Administração Mackenzie - Universidade Presbiteriana Mackenzie (UPM)false
dc.title.none.fl_str_mv 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
Vélez-Pareja,Ignacio
Weighted average cost of capital
Firm valuation
Capital budgeting
Equity cost of capital
Market value
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
author Vélez-Pareja,Ignacio
author_facet Vélez-Pareja,Ignacio
Tham,Joseph
author_role author
author2 Tham,Joseph
author2_role author
dc.contributor.author.fl_str_mv Vélez-Pareja,Ignacio
Tham,Joseph
dc.subject.por.fl_str_mv Weighted average cost of capital
Firm valuation
Capital budgeting
Equity cost of capital
Market value
topic Weighted average cost of capital
Firm valuation
Capital budgeting
Equity cost of capital
Market value
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.
publishDate 2009
dc.date.none.fl_str_mv 2009-12-01
dc.type.driver.fl_str_mv info:eu-repo/semantics/article
dc.type.status.fl_str_mv info:eu-repo/semantics/publishedVersion
format article
status_str publishedVersion
dc.identifier.uri.fl_str_mv http://old.scielo.br/scielo.php?script=sci_arttext&pid=S1678-69712009000600007
url http://old.scielo.br/scielo.php?script=sci_arttext&pid=S1678-69712009000600007
dc.language.iso.fl_str_mv eng
language eng
dc.relation.none.fl_str_mv 10.1590/S1678-69712009000600007
dc.rights.driver.fl_str_mv info:eu-repo/semantics/openAccess
eu_rights_str_mv openAccess
dc.format.none.fl_str_mv text/html
dc.publisher.none.fl_str_mv Editora Mackenzie
Universidade Presbiteriana Mackenzie
publisher.none.fl_str_mv Editora Mackenzie
Universidade Presbiteriana Mackenzie
dc.source.none.fl_str_mv RAM. Revista de Administração Mackenzie v.10 n.6 2009
reponame:RAM. Revista de Administração Mackenzie
instname:Universidade Presbiteriana Mackenzie (UPM)
instacron:MACKENZIE
instname_str Universidade Presbiteriana Mackenzie (UPM)
instacron_str MACKENZIE
institution MACKENZIE
reponame_str RAM. Revista de Administração Mackenzie
collection RAM. Revista de Administração Mackenzie
repository.name.fl_str_mv RAM. Revista de Administração Mackenzie - Universidade Presbiteriana Mackenzie (UPM)
repository.mail.fl_str_mv revista.adm@mackenzie.br
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