A general formula for the WACC
AbstractRecent 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 InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 05-012.RS.
Length: 12 p.
Date of creation: Apr 2005
Date of revision:
Publication status: Published by: Centre Emile Bernheim, Bruxelles
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WACC; APV; tax shield;
Other versions of this item:
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-05 (All new papers)
- NEP-CFN-2006-02-05 (Corporate Finance)
- NEP-FIN-2006-02-05 (Finance)
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.:
- Jacques Chrissos & Roland Gillet, 2008. "Décision d'investissement," ULB Institutional Repository 2013/14363, ULB -- Universite Libre de Bruxelles.
- 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.
- Fernandez, Pablo, 2004. "The value of tax shields is NOT equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 73(1), pages 145-165, July.
- 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.
- Fernandez, Pablo, 2007. "A more realistic valuation: APV and WACC with constant book leverage ratio," IESE Research Papers D/715, IESE Business School.
- Fernandez, Pablo, 2006. "A general formula for the WACC: A correction," IESE Research Papers D/663, IESE Business School.
- 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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