The Theoretical Fallacy and Valuation Bias of Existing WACC Formula

摘要

A few simple examples reveal that existing WACC formula for valuation conflicts with the principle of value's additivity.Based on the discounted cash flow method and the principle ofvalue's additivity, accurate WACC formula is derived. Comparative analysis of the two formulas suggests that only in very few cases two formulas yield the same results; under certain strong conditions,existing formula can be used as an approximate alternative for the accurate WACC formula; in most cases, existing formula may result significant positive valuation bias. After numerically analysis of the valuation bias, practical suggestion about the usage of the two formulas is presented.