This technical note compares two methods of treating debt usage in discounted-cash-flow valuation of investment projects or companies. The note demonstrates that the approach using weighted average cost of capital (WACC) and the approach using equity residual (ER) yield equivalent results if consistent assumptions are used. General features are illustrated with specific examples, including a spreadsheet.
Harris, R. (2017), "A Comparison of the Weighted-Average Cost of Capital and Equity-Residual Approaches to Valuation", Darden Business Publishing Cases. https://doi.org/10.1108/case.darden.2016.000005Download as .RIS
University of Virginia Darden School Foundation
Copyright © 2000 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved.