FRAMEWORK FOR VALUATION UNDER VARIABLE WACC

The scope of this research is to provide a theoretical framework to the Variable Cost of Capital. Current theory uses Static Capital Structure and Constant Cost of Capital for Firm Valuation. This is being challenged and an improved approach to measure the Firm value on the basis of a Variable Capital Structure and hence Variable Cost of Capital, is being proposed. When a firm changes its Financial Leverage, it is expected that the Components of Cost of Capital will change. Cost of Equity is known to have a linear relation with Financial Leverage). If the level of Debt in Capital Structure varies, the cash flow available to the Debt holders as well as the Equity holders will change. The risk-level borne by the Debt holder as well as the Equity holder will also change. Keeping this in mind, the constancy assumption of the Cost of Debt is being challenged in the paper. The Weighted Average Cost of Capital, useful for discounting firm cash flows, is being estimated as being Variable with time, in the proposed paper. The existing and proposed Valuation Frameworks are being detailed below and the variables in the current literature as well as the proposed concept are tabulated below. This empirical investigation should be conducted with a set of sample firms. The results from the empirical investigation should be divided into Valuation using Static WACC and Valuation using Dynamic WACC. The difference in Value obtained using the two methodologies should be compared for statistical differences. The idea of Dynamic WACC can be extended to the problem of Firm Valuation as well as Project Valuation and Corporate finance practitioners can get a better sense of the risk level of the firm.