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2:36 pm
June 30, 2010
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MrBook
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| Member | posts 30 |
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Hey Guys & Gals it's MrBook. Check out what I said about WACC,CAPM and Beta in the Tools and Resources section!
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11:46 pm
May 2, 2010
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Jae Jun
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The other major error with WACC is that it is also based off beta. To me, beta is completely ignorant of all value investing principles. It's not that I haven't tried using WACC, but I've found through my studies that WACC can not hold it's own as well.
According to Buffett, Bruce Greenwald and many other value investor gurus it is perfectly fine to use a discount rate that represents the expected return rate.
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5:21 pm
May 1, 2010
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jakejacobson
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Read your link, I don't follow your logic. You discount by your expected minimum rate of return, which causes you to use 15% for a smaller company with more risk and 9% for Apple? Wouldn't you exepect (and likewise the whole market expects) a high return from Apple? And what about leverage? Future cash flows need to maintain the entiere capital structure, i.e. debt maintenance as well as shareholder returns.
A quick look at Apple's balance sheet, looks like their cost of equity would be around 13%. With no debt their WACC will be the same. So if you discount by 9% you are going to overstate the FCF valuation by quite a bit.
You really should use WACC. The discount rate has sunch a large impact on the projected value, you have to get it right to have confidence in your projections. A WAG based on your expected return that ignors the firm's current and target capital structure opens you up for material errors.
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2:35 pm
May 1, 2010
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Jae Jun
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There are many ways to think about the discount rate but here's a link to my philosophy.
http://www.oldschoolvalue.com/…..unt-rates/
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8:24 am
April 30, 2010
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jakejacobson
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Jae: just downloaded your tool and starting to understand how it works. A question on your DCF calculation. You use 3, 9, 15, or 20% as the discount factors in your NPV calc. I've always understood you should discount the cash flows by the companies individual Weighted Average Cost of Capital. How did you arrive at your method?
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