infonet-economy

This paper argues that in practical applications the weighted average cost of capital (WACC) is often incorrectly estimated due to the simultaneous use of two inconsistent input parameters: (i) a beta of debt equal to zero when transforming asset betas into equity betas (beta levering) and (ii) a cost of debt above the risk-free interest rate when calculating the WACC. The paper discusses and quantifies the consequences of this inconsistency and offers viable solutions. By replacing the cost of debt with the risk-free rate, a more accurate WACC is calculated and the estimation of the cost of debt becomes obsolete. Furthermore, the paper presents a solution to obtain the correct WACC without increasing the calculation's complexity.