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A general formula for the WACC

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  • André Farber
  • Roland Gillet
  • Ariane Szafarz

Abstract

Recent controversies testify that the tax shield valuation remains a hot topic in the financial literature. Basically, two methods have been proposed to incorporate the tax benefit of debt in the present value computation: The adjusted present value(APV), and the classical weighted average cost of capital (WACC). This note clarifies the relationship between these two apparently different approaches by offering a general formula for the WACC. This formula encompasses earlier results obtained by Modigliani and Miller (1963) and Harris and Pringle (1985).

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 05-012.RS.

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Length: 12 p.
Date of creation: Apr 2005
Date of revision:
Publication status: Published by: Centre Emile Bernheim, Bruxelles
Handle: RePEc:sol:wpaper:05-012

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Keywords: WACC; APV; tax shield;

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  1. Jacques Chrissos & Roland Gillet, 2008. "Décision d'investissement," ULB Institutional Repository 2013/14363, ULB -- Universite Libre de Bruxelles.
  2. Fernández , Pablo, 2002. "The value of tax shields is not equal to the present value of tax shields," IESE Research Papers D/459, IESE Business School.
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Cited by:
  1. André Farber & Roland Gillet & Ariane Szafarz, 2007. "A general formula for the WACC: a reply," Working Papers CEB 07-004.RS, ULB -- Universite Libre de Bruxelles.
  2. Fernandez, Pablo, 2007. "A more realistic valuation: APV and WACC with constant book leverage ratio," IESE Research Papers D/715, IESE Business School.
  3. Fernandez, Pablo, 2006. "A general formula for the WACC: A correction," IESE Research Papers D/663, IESE Business School.
  4. Christian Koziol, 2014. "A simple correction of the WACC discount rate for default risk and bankruptcy costs," Review of Quantitative Finance and Accounting, Springer, vol. 42(4), pages 653-666, May.

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