Can WACC be used to value an entire business?

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Can WACC be used to value an entire business?



Answer: Just think of the business as a very large project. Forecast the business's operating cash flows (after-tax profits plus depreciation), and subtract the future investments in plant and equipment and in net working capital. The resulting FREE CASH FLOWS can then be discounted back to the present at the weighted-average cost of capital. The appropriate WACC reflects the riskiness of the firm and the selected capital structure. Of course, the cash flow flows from a company may stretch far into the future. Financial managers therefore typically produce detailed cash flows only up to some horizon date and then estimate the remaining value of the business at the horizon.

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