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A General Formula for the WACC: A Reply

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Author Info
André Farber () (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.)
Roland Gillet () (Université Paris1-Panthéon-Sorbonne, Paris and Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
Ariane Szafarz () (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels, and DULBEA, Université Libre de Bruxelles.)

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Abstract

Farber, Gillet and Szafarz (2006) propose a general formula for the WACC in which the expected return on the tax shield appears explicitly. The classical Modigliani-Miller and Harris-Pringle WACC formulas for specific debt policies are then derived from the general formula after having determined the corresponding tax shield expected returns. Replying to Fernandez’ (2007) comment, this note explores, in addition, the validity of the general formula in the Miles-Ezzel setup with annual adjustment of the level of debt to maintain a constant market-value debt ratio.

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File URL: http://www.solvay.edu/EN/Research/Bernheim/documents/wp07004.pdf
File Format: application/pdf
File Function: First version, 2007
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Publisher Info
Paper provided by Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) in its series Working Papers CEB with number 07-004.RS.

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Length: 8 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:sol:wpaper:07-004

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Keywords: WACC; value of tax shield.;

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Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity

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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. Fernandez, Pablo, 2006. "A general formula for the WACC: A correction," IESE Research Papers D/663, IESE Business School. [Downloadable!]
  2. Miles, James A. & Ezzell, John R., 1980. "The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(03), pages 719-730, September. [Downloadable!]
  3. 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!]
    Other versions:
  4. Robert A. Taggart & Jr., 1991. "Consistent valuation and Cost of Capital Expressions With Corporate and Personal Taxes," Financial Management, Financial Management Association, vol. 20(3), Fall.
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