Return to basics: cost of capital depends on free cash flow

Most popular corporate finance textbooks and practitioners present the WeightedAverage Cost of Capital WACC calculation as independent from the Free Cash Flow.It is a common use that practitioners calculate a WACC a priori and use it independentlyfrom the firm value (this is, from FCF). In this note we show that FCF affects WACC andthat this interrelationship creates circularity, but we show how it can be solved in a veryeasy way. There are two appendixes: one explaining the circularity issue and another one forderiving the proper formulation of the cost of equity.