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A general formula for the WACC: a reply

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  • André Farber
  • Roland Gillet
  • Ariane Szafarz

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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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 07-004.RS.

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Length: 8 p.
Date of creation: Mar 2007
Date of revision:
Publication status: Published by: Centre Emile Bernheim, Bruxelles
Handle: RePEc:sol:wpaper:07-004

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Keywords: WACC; value of tax shield.;

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  1. André Farber & Roland Gillet & Ariane Szafarz, 2005. "A general formula for the WACC," Working Papers CEB 05-012.RS, ULB -- Universite Libre de Bruxelles.
  2. 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.
  3. 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.
  4. Fernandez, Pablo, 2006. "A general formula for the WACC: A correction," IESE Research Papers D/663, IESE Business School.
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