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More on the Weighted Average Cost of Capital: A Comment and Analysis

Author

Listed:
  • Linke, Charles M.
  • Kim, Moon K.

Abstract

The mathematical difficulties encountered when attempting to express the internal rate of return (IRR) of a combination of two or more investments as a weighted algebraic sum of the individual investments' IRRs has been recognized in the financial literature for some time. However, in a recent issue of this journal, Professors Reilly and Wecker (hereafter R-W) [3] apply the well-known mathematical impossibility of expressing the root(s) of a polynomial as an algebraic combination of the roots of related polynomials to question the validity of the weighted cost of capital (kw) concept.

Suggested Citation

  • Linke, Charles M. & Kim, Moon K., 1974. "More on the Weighted Average Cost of Capital: A Comment and Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(6), pages 1069-1080, December.
    • Handle: RePEc:cup:jfinqa:v:9:y:1974:i:06:p:1069-1080_02
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    Cited by:

    1. Knolle, Julia, 2020. "Prosperity in a Low Interest Environment," MPRA Paper 104332, University Library of Munich, Germany.
    2. Axel Pierru & Denis Babusiaux, 2000. "Coût du capital et étude de rentabilité d'investissement : une formulation unique de l'ensemble des méthodes," Working Papers hal-02437423, HAL.
    3. Denis Babusiaux & Axel Pierru, 2000. "Calculs de rentabilité et mode de financement des projets d'investissement Propositions méthodologiques," Working Papers hal-02437391, HAL.
    4. Pierru, Axel, 2009. ""The weighted average cost of capital is not quite right": A comment," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1219-1223, August.
    5. John R. Ezzell & James A. Miles, 1983. "Capital Project Analysis And The Debt Transaction Plan," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 6(1), pages 25-31, March.
    6. D. Babusiaux, 1988. "Financing investment and calculations of profitability [Financement des investissements et calculs de rentabilité]," Working Papers hal-01534450, HAL.
    7. Babusiaux, Denis & Pierru, Axel, 2001. "Capital budgeting, investment project valuation and financing mix: Methodological proposals," European Journal of Operational Research, Elsevier, vol. 135(2), pages 326-337, December.
    8. Denis Babusiaux & Jean Jaylet, 1996. "lnvestment Project Analysis and Financing Mix. A New Method in Sight ?," Working Papers hal-02435463, HAL.

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