Publikation:

WACC Calculations in Practice : Incorrect Results due to Inconsistent Assumptions - Status Quo and Improvements

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Kind_286207.pdf
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2013

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Grüninger, Matthias C.

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http://nbn-resolving.de/urn:nbn:de:bsz:352-286207
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https://doi.org/10.5430/afr.v2n2p36
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Accounting and Finance Research. 2013, 2(2). ISSN 1927-5994. eISSN 1927-5994. Available under: doi: 10.5430/afr.v2n2p36

Zusammenfassung

This paper argues that in practical applications the weighted average cost of capital (WACC) is often incorrectly estimated due to the simultaneous use of two inconsistent input parameters: (i) a beta of debt equal to zero when transforming asset betas into equity betas (beta levering) and (ii) a cost of debt above the risk-free interest rate when calculating the WACC. The paper discusses and quantifies the consequences of this inconsistency and offers viable solutions. By replacing the cost of debt with the risk-free rate, a more accurate WACC is calculated and the estimation of the cost of debt becomes obsolete. Furthermore, the paper presents a solution to obtain the correct WACC without increasing the calculation’s complexity.

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330 Wirtschaft

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ISO 690GRÜNINGER, Matthias C., Axel KIND, 2013. WACC Calculations in Practice : Incorrect Results due to Inconsistent Assumptions - Status Quo and Improvements. In: Accounting and Finance Research. 2013, 2(2). ISSN 1927-5994. eISSN 1927-5994. Available under: doi: 10.5430/afr.v2n2p36
BibTex
@article{Gruninger2013Calcu-28620,
  year={2013},
  doi={10.5430/afr.v2n2p36},
  title={WACC Calculations in Practice : Incorrect Results due to Inconsistent Assumptions - Status Quo and Improvements},
  number={2},
  volume={2},
  issn={1927-5994},
  journal={Accounting and Finance Research},
  author={Grüninger, Matthias C. and Kind, Axel}
}
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