IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v8y1973i01p123-126_01.html
   My bibliography  Save this article

On the Weighted Average Cost of Capital

Author

Listed:
  • Reilly, Raymond R.
  • Wecker, William E.

Abstract

The weighted average cost of capital is a widely used concept in the theoretical literature of finance as well as in the analysis of capital expenditures of business firms. The importance of the concept derives from its use as the cutoff point for investment in capital projects and as an indicator of optimal capital structure. Differences between the weighted average cost of capital and the true overall cost of capital are typically attributed to deviations of market values from book values, changes in the proportional use of specific capital sources, or alterations in the risk characteristics of the stream of payments to owners and creditors. This paper abstracts from the aforementioned problems to focus on the mathematical error of using weighted average cost of capital to represent the true overall capital cost. It is determined that, in general, the calculation of weighted average cost leads to an erroneous value of the minimum acceptable level of return. The fault lies in the general inability to express the root(s) of a polynomial as an algebraic combination of the roots of other related polynomials.

Suggested Citation

  • Reilly, Raymond R. & Wecker, William E., 1973. "On the Weighted Average Cost of Capital," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(1), pages 123-126, January.
    • Handle: RePEc:cup:jfinqa:v:8:y:1973:i:01:p:123-126_01
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109000019141/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Knolle, Julia, 2020. "Prosperity in a Low Interest Environment," MPRA Paper 104332, University Library of Munich, Germany.
    2. Ravi Thirumalaisamy, 2015. "A Study on Cost of Capital," International Journal of Empirical Finance, Research Academy of Social Sciences, vol. 4(1), pages 1-11.
    3. Rodolfo Apreda, 2008. "Cost of capital adjusted for governance risk through a multiplicative model of expected returns," CEMA Working Papers: Serie Documentos de Trabajo. 383, Universidad del CEMA.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:8:y:1973:i:01:p:123-126_01. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.