Application of WACC in DCF

Video explanations include theory and some background APV does not add anything new to valuation. Correct application of the WACC accounts for all items in the bridge between equity value and enterprise value in the WACC calculation. Investment bankers typically do this with using net debt rather than gross debt in computing WACC. Similar adjustments to the WACC should be made for associated investments not included in EBITDA, the fair value of derivatives, discounted operations and any other items.

Cost of Capital Subject File Reference Video Link
Interest Tax Shield Part 1 with Introduction to Net of Tax Method Interest Shield Exercise https://www.youtube.com/watch?v=G6BBvAFHJGo
Demonstrate that Net of Tax Method in Capital Structure Values Tax Shield Interest Shield Exercise https://www.youtube.com/watch?v=9LKppeYudVU
How to Compute Ku with Net of Tax Method Un-lever and Re-lever with Tax Shield https://www.youtube.com/watch?v=jaLOx3RJFkc
Overview of How Debt Beta Influences WACC Theory of Debt Beta and WACC https://www.youtube.com/watch?v=n_csEtMHveA
Demonstrates use of Interpolate Function Mechanics of Debt Beta and WACC https://www.youtube.com/watch?v=Bvp0ruVYBSw
How to Compute Ku with Net of Tax and Debt Beta Unlever and Re-lever with Varying WACC https://www.youtube.com/watch?v=7ny67y-EpR8
Demonstrates Valuation with WACC and Net of Tax Method Growth Rate, Tax Shields and WACC https://www.youtube.com/watch?v=oKNmQ9fimZc
Shows Bias in WACC from Growth Circularity, WACC and Ku https://www.youtube.com/watch?v=2EPd8_yi_0M
Shows how to Use Goal Seek to Resolve Bias WACC Growth and Goal Seek https://www.youtube.com/watch?v=JEahjlc8QFs
Demonstrates that Target Capital Structure is Irrelveant without Tax Shield Target Capital Structure without Taxes https://www.youtube.com/watch?v=1k8Ij-biv3w
How to Resolve Target Capital Structure with Tax Shield Target Capital Structure with Tax Shield https://www.youtube.com/watch?v=PkIsIOtAqy4
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Application of WACC in the DCF

The files associated with the videos demonstrate how to make appropriate adjustments to the DCF model. For this lesson I did not include exercises as part of the individual files. Instead, if you want credit for completing the lesson set, you should fix the Disney case study that is part of the case study page. Alternatively, you can go to the corporate model page and fix the DCF page in the various models. You should include a page where you find betas and correctly compute the all equity and debt betas using the net of tax capital structure. You should then compute the value of the company using the net of tax capital structure and subtract the net of tax debt. All you have to do then is to send me 40 Euro and you will get your name on the success page. If you have ever taken one of my courses in person, you do not have to pay the fee.

I am in the process of uploading files that explain the WACC ideas in the files below.  If you want to look at the files, send me an e-mail to edwardbodmer@gmail.com and request the resource library.

  • Debt Beta.xlsm
  • Target Capital Structure.xlsm
  • Tax Effects of Interest in Valuation Exercise.xlsm
  • Valuation Circularity.xlsm
  • WACC and Growth working.xlsm
  • WACC and Growth with Goal Seek Macro.xlsm