The misuse of WACC might be due to several reasons. Traditionally there have
not been computing tools to solve the circularity problem in WACC calculations. Now it
is possible and easy with the existence of spreadsheets. Not having these computing
resources in the previous years it was necessary to use simplifications such as calculating
just one single discount rate or in the best of cases to use the book values in order to
calculate the WACC.
Here a detailed (but known) methodology to calculate the WACC has been
presented taken into account the market values in order to weigh the cost of debt and the
cost of equity. By the same token a methodology based on the WACC before taxes Ku,
constant (assuming stable macroeconomic variables, such as inflation) that does not
depend on the capital structure of the firm has been presented.
The most difficult task is the estimation of Ku, or alternatively, the estimation of
Ke. Here, a methodology to estimate those parameters is suggested. If it is possible to
estimate Ku from the beginning, it will be possible to calculate the total and equity value
independently from the capital structure of the firm, using the CCF approach or the
Adjusted Present Value approach and discounting the tax savings at Ku.
In summary, the different methodologies presented to calculate the total value of the firm
are consistent and yield identical values