A note resolving the debate on “The weighted average cost of capital is not quite right”
AbstractMiller (2009a) derives a weighted average cost of capital for the special case where the cash flows to equity and the cashflows to debt are annuities. The paper attracts debate. We show that the weighted average cost of capital is redundant in a world where interest paid is not tax deductible. The required rate of return on unlevered equity will consistently and reliably estimate the net present value of any project no matter the idiocyncratic beliefs of the analyst as to the year-by-year leverage of the project, or of the firm. We recommend that the weighted average cost of capital method is discarded. Our recommendation also applies to a world where interest paid is tax deductible.
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Bibliographic InfoPaper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 2003.
Date of creation: 2011
Date of revision:
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Postal: Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand
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WACC; finite life; discount rate; net present value; leverage;
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