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A general formula for the WACC: A correction

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Author Info
Fernandez, Pablo () (IESE Business School)

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Abstract

This paper corrects some of the equations of Farber, Gillet and Szafarz (2006). The WACC is a discount rate widely used in corporate finance. However, correctly calculating the WACC involves properly calculating the value of tax shields, and the value of tax shields depends on the company's debt policy. Many authors [e.g. Inselbag and Kaufold (1997), Booth (2002), Cooper and Nyborg (2006), Farber, Gillet and Szafarz (2006)] have stated that debt policy can only be implemented by maintaining a fixed market-value debt ratio (Miles-Ezzell's assumption) or a fixed dollar amount of debt (Modigliani-Miller's assumption).

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Publisher Info
Paper provided by IESE Business School in its series IESE Research Papers with number D/663.

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Length: 7 pages
Date of creation: 16 Dec 2006
Date of revision:
Handle: RePEc:ebg:iesewp:d-0663

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Related research
Keywords: required return to equity; value of tax shields; company valuation; cost of equity;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Miles, James A & Ezzell, John R, 1985. " Reformulating Tax Shield Valuation: A Note," Journal of Finance, American Finance Association, vol. 40(5), pages 1485-92, December. [Downloadable!] (restricted)
  2. André Farber & Roland Gillet & Ariane Szafarz, 2005. "A general formula for the WACC," Working Papers CEB 05-012.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
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  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. [Downloadable!] (restricted)
  4. Laurence Booth, 2002. "Finding Value Where None Exists: Pitfalls In Using Adjusted Present Value," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(1), pages 95-104. [Downloadable!] (restricted)
  5. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
  6. Lewellen, Wilbur G. & Emery, Douglas R., 1986. "Corporate Debt Management and the Value of the Firm," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(04), pages 415-426, December. [Downloadable!]
  7. Cooper, Ian A. & Nyborg, Kjell G., 2006. "The value of tax shields IS equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 81(1), pages 215-225, July. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. André Farber & Roland Gillet & Ariane Szafarz, 2007. "A General Formula for the WACC: A Reply," Working Papers CEB 07-004.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
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