Module II· WACC & Capital StructureBasic
Question
Why do you use WACC and not just the cost of equity in the DCF?
Answer
Mechanics
- UFCF + WACC: UFCF belongs to all capital providers (equity + debt) → weighted discount rate
- LFCF + cost of equity: LFCF after interest → belongs only to equity providers
Theory
Both approaches lead to the same equity value.
Why UFCF + WACC is the IB standard
- UFCF is easier to project (no debt schedule needed)
- Allows capital-structure changes without rebuilding the model
- Market standard, comparable