why weighted average cost of capital hurts shareholders ?

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Weighted Average Cost of Capital (WACC) does not align with the manner in which cash flows actually occur in a business enterprise, leading to financial shocks that eventually hurts shareholder wealth.

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Page 1: Why Weighted Average Cost of Capital hurts Shareholders ?

Copyright 2013: Rajesh D. Mudholkar, Author - The Timeless Essence of Financial Science. http://valueerodingfallacies.blogspot.in

WACCWACCviolates the violates the WYDIWYPWYDIWYP

principleprinciple(What You Do Is What You Plan)(What You Do Is What You Plan)

Page 2: Why Weighted Average Cost of Capital hurts Shareholders ?

Copyright 2013: Rajesh D. Mudholkar, Author - The Timeless Essence of Financial Science. http://valueerodingfallacies.blogspot.in

$50

L

Interest

10%

$50

E

ROE20%

Project cost

$100PLC

WACC15%

Page 3: Why Weighted Average Cost of Capital hurts Shareholders ?

Copyright 2013: Rajesh D. Mudholkar, Author - The Timeless Essence of Financial Science. http://valueerodingfallacies.blogspot.in

$100

PLC

$20

$20$20 $20$20 $5

Profit

5

Page 4: Why Weighted Average Cost of Capital hurts Shareholders ?

Copyright 2013: Rajesh D. Mudholkar, Author - The Timeless Essence of Financial Science. http://valueerodingfallacies.blogspot.in

$5

PLC

L

ThankYou!

E

Hey!WACC’sunfair!

Page 5: Why Weighted Average Cost of Capital hurts Shareholders ?

Copyright 2013: Rajesh D. Mudholkar, Author - The Timeless Essence of Financial Science. http://valueerodingfallacies.blogspot.in

E

# @ % #Why didn’tYou plan

That way??

CompanyLaw

Principle:Pay lenders

First

PLCSorry!

Page 6: Why Weighted Average Cost of Capital hurts Shareholders ?

Copyright 2013: Rajesh D. Mudholkar, Author - The Timeless Essence of Financial Science. http://valueerodingfallacies.blogspot.in

E

# @ % #Why didn’tYou plan

That way??

CompanyLaw

Principle:Pay lenders

First

PLCSorry!