In this journal [Miller, R. A. (2009). The weighted average cost of capital is not quite right. The Quarterly Review of Economics and Finance, 49, 128-138], I argued that the standard WACC formula is inadequate in most circumstances to reward stockholders and bondholders where the necessary cash flows are calculated separately to exactly cover the respective costs of capital. Axel Pierru [2009. [`]The weighted average cost of capital is not quite right': A comment. The Quarterly Review of Economics and Finance, 49, 1219-1223] observes correctly that my assumed repayment schedules (equal periodic payments to bondholders; similarly for stockholders) imply a temporal drift in the debt (or leverage) ratio; he would recalculate the WACC annually. He proposes an alternative calculation of the repayment schedules under the constraint of a constant debt ratio. Here I suggest three additional possible repayment schedules; in general repayment schedules determine the drift in the debt ratio. However, the expected repayment schedules are established at the time the project is accepted and financed, hence the relevant debt ratio is that which exists at that time. The WACC for a specific project need not (and should not) be recalculated for that project throughout its financial life when that project has already been accepted and financed.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 49 (2009) Issue (Month): 3 (August) Pages: 1213-1218 Download reference. The following formats are available: HTML
(with abstract),
plain text
(with abstract),
BibTeX,
RIS (EndNote, RefMan, ProCite),
ReDIF
Did you know? Citation analysis on IDEAS includes online papers that are freely accessible and whose text could be automatically analyzed, currently about 210000 papers.