Abstract
Weighting Average Cost of Capital (WACC) plays a critical role as a discounting factor of the corporate valuation process's estimated future free cash flow by highly influencing the valuation process. It consists of three components, namely cost of debt, cost of equity, and proportion of capital structure. Costs of debt and capital structure are easily calculated due to data stability and less volatility. Meanwhile, the cost of equity is difficult to determine due to assumption, the period taken, the method applied, and complexity. Many assets pricing methods are used to determine the required rate of return in equity, namely CAPM, Fama French Three-Factor (FF3F), and Fama French Five-Factor (FF5F). These three asset pricing models are used to determine the models with strong explanatory factors on equity return to portfolios developed from sorting FF5F factors and individual equity of four cement companies publicly listed in the Indonesia Stock Exchange (IDX).
Highlights
The Weighting Average Cost of Capital (WACC) is a critical part of the Discounted Cash Flow valuation process
This study investigated the implementation and comparison of the 3 asset pricing models in the Indonesian Stock Exchange and the cement industry
This is proven by a t-statistic of −0.9648 which is less than the t-table of 1.9935 and this indicates that the intercept is insignificant in the HML regression
Summary
The Weighting Average Cost of Capital (WACC) is a critical part of the Discounted Cash Flow valuation process. It is described as a company’s discounting factor for a stream of projected future free cash flow, which directly influences the valuation result. Costs of debt and capital structure are determined due to data availability and less volatility. The cost of equity Ri is more difficult because of the selection and application of various options or methods. It is commonly calculated by using the Asset Pricing Theory
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