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Briefly explain how WACC can be used for valuing a business

Briefly explain how WACC can be used for valuing a business

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The value of a business can be estimated by calculating the present value of free cash flows (FCF) generated by a firm using WACC as the discounts rate for the life of the firm. FCF is estimated by adding profits after taxes, depreciation, investments in fixed assets, and investments in working capital. From a practical point of view, FCFs are estimated for a few years and the present value of the horizon value is calculated using a reasonable constant growth rate for the rest of the years. The value of the firm is the present value of free cash flows plus the present value of the horizon value.

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