Hester Ng
Corporate Finance
Capital Costs in Company Valuation
Why WACC Alone Is Not Enough
Hester Ng
WACC
E/V × rE + D/V × rD × (1-T)
APV
VL = VU + PV(TS)
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Research Summary
Abstract
Most companies use a single corporate WACC to value everything, but this approach breaks its own assumptions when leverage changes, project risks differ, or tax shields are uncertain. This paper presents a decision framework for choosing between WACC, APV, CCF, and FTE methods.
W
A
C
F
Research Insights
Key Findings
1
Single WACC breaks when leverage, risk, or tax shields are not stable
WACC assumes constant debt ratio, but LBOs, project finance, and recapitalizations violate this.
2
APV isolates financing value from business value
APV = Unlevered Value + PV(Tax Shields). Better for fixed debt schedules.
3
CCF simplifies when debt is already modeled year-by-year
Same result as WACC but with one constant discount rate.
4
FTE answers 'what do shareholders get?'
Best for equity investors, private equity, or minority shareholders.
Valuation Approaches
Valuation Methods Compared
W
WACC
Stable leverage, average risk, predictable tax shields
A
APV
Changing leverage, fixed debt schedules, LBOs
C
CCF
Debt and taxes already modeled year-by-year
F
FTE
Valuing only equity, known fixed debt policy
Method Selection
Method Choice Rule
Start
What are we valuing?
Whole firm / project value
WACC safe zone?
Yes ✓
WACC
Stable debt ratio
No ✗
APV
CCF
Changing leverage
Only equity holders' cash
Value to shareholders only
FTE
Flow to Equity
Recommended for stable capital structure
Best for changing leverage
Equity-focused valuation
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Corporate Finance • Hochschule Rhein-Waal
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Corporate Finance • Hochschule Rhein-Waal