On the Non-Equivalence of Two Definitions of Asset Values

Abstract

By definition, asset value is equal to the sum of debt and equity. Asset value is also defined as cash flows discounted by weighted average cost of capital. If the second definition is valid, both definitions should give the same result for the same asset under all circumstances. We prove that for a simple asset, two definitions provide different valuations. This shows that the method of WACC discounting does not provide correct measurement for asset values. Since the concept of WACC plays prominent roles in corporate finance, we need to reexamine some fundamental issues in finance.