12: 55 (6) Unfolding Capital Cash Flow Valuation

Capital cash flow valuation

The future cash flows are discounted using the discount rate calculated

above.

The relation between CCF and FCF valuation

Riskless debt and a constant capital structure

FCF method

The discount rate used in this method will be after-tax WACC. It has

two components- the after-tax cost of debt and levered cost of equity.

The after-tax cost of debt will equal to KD*(1-t), where t is the tax rate.

The levered cost of equity is calculated by unlevering the βA to arrive

at the levered equity beta.

ΒE = βA * V/E

Using this βE, the cost of equity KE can be calculated as:

KE = RF + βE*RP

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14/12/2021, 12:55

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Now, the after-tax WACC is calculated as:

After-tax WACC = D/V* KD*(1-t) + E/V* KE.