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"The weighted average cost of capital is not quite right": A rejoinder

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  • Pierru, Axel
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    Abstract

    Richard Miller's reply (2008) to my comment (2008) on his claim (2007) that the standard WACC formula fails to correctly remunerate shareholders and bondholders raises crucial questions on the nature of the project's debt that he considers in his calculations. To clarify this point, I here introduce several possible definitions of a loan associated with a project, and discuss their respective relevance for a WACC calculation. In addition, Mr. Miller's suggestion that the standard WACC formula is not quite right remains unsubstantiated.

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    Bibliographic Info

    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 49 (2009)
    Issue (Month): 4 (November)
    Pages: 1481-1484

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    Handle: RePEc:eee:quaeco:v:49:y:2009:i:4:p:1481-1484

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    Web page: http://www.elsevier.com/locate/inca/620167

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    Keywords: WACC Cost of capital Debt ratio Leverage ratio Cost of equity;

    References

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    1. Robert A. Taggart & Jr., 1991. "Consistent valuation and Cost of Capital Expressions With Corporate and Personal Taxes," Financial Management, Financial Management Association, Financial Management Association, vol. 20(3), Fall.
    2. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, Financial Management Association, vol. 31(2), Summer.
    3. Isik Inselbag & Howard Kaufold, 1997. "Two Dcf Approaches For Valuing Companies Under Alternative Financing Strategies (And How To Choose Between Them)," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(1), pages 114-122.
    4. Axel Pierru & Denis Babusiaux, 2008. "Valuation of investment projects by an international oil company: a new proof of a straightforward, rigorous method," OPEC Energy Review, Organization of the Petroleum Exporting Countries, Organization of the Petroleum Exporting Countries, vol. 32(3), pages 197-214, 09.
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    Cited by:
    1. Keef, Stephen P. & Khaled, Mohammed S. & Roush, Melvin L., 2012. "A note resolving the debate on “The weighted average cost of capital is not quite right”," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 52(4), pages 438-442.
    2. Keef, Stephen P & Khaled, Mohammed S & Roush, Melvin L, 2011. "A note resolving the debate on “The weighted average cost of capital is not quite right”," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 2003, Victoria University of Wellington, School of Economics and Finance.
    3. Pierru, Axel & Babusiaux, Denis, 2010. "WACC and free cash flows: A simple adjustment for capitalized interest costs," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 50(2), pages 240-243, May.
    4. Pierru, Axel & Roussanaly, Simon & Sabathier, Jérôme, 2013. "Capital structure in LNG infrastructures and gas pipelines projects: Empirical evidences and methodological issues," Energy Policy, Elsevier, vol. 61(C), pages 285-291.
    5. Keef, Stephen P & Khaled, Mohammed S & Roush, Melvin L, 2011. "Miller's (2009) WACC model: An extension," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 1995, Victoria University of Wellington, School of Economics and Finance.

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