Choosing an Appropriate Weighted Average Cost of Capital Definition Sometimes Depends On Context Valuation principles generally hold that the value of a business is largely a function of return on invested capital and growth, writes J. Richard Claywell, since these are the primary drivers of free cash flow. But how does this cash flow relate to the asset and liability values on the balance sheet?
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When Valuators Use a Weighted Average Cost of Capital (WACC) to Determine a Discount Rate, the Rate Needs to Be “Iterated.” Here’s Why. When an expert determines a discount rate for a controlling interest in a valuation using the Weighted Average Cost of Capital (WACC), that discount rate needs to be iterated. Since market values of debt and equity in a closely held company are not publicly traded and known, as Richard Claywell explains, the iteration process is necessary. It’s the only way to demonstrate the validity of using an industry average capital structure. Without iteration your discount rate—and proposed…
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The Weighted Average Method of Estimating Expected Future Earnings is Based on the Average or Arithmetic Mean. Here’s Why that’s Important. Companies that are growing in revenue need to be valued regularly, and they need to be valued with their future growth in mind. The weighted average approach is a valuable tool. But Richard Claywell suggests caution in using it to extrapolate large projections of future revenue. Why? Partly because it’s quite often typical for fast-growing companies to experience their most dramatic growth during their early years—and it’s important to focus on current market conditions more than past or imagined…
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Be Careful When Using EBITDA for the Terminal Valuation Calculation If you’re going to construct consistent valuations, use earnings instead of cash flows in your calculations. Why is it important to be consistent? Because you have to calculate a discount rate based on one or the other. Richard Claywell explains.