"The weighted average cost of capital is not quite right": A comment
In this journal, Miller [Miller, R. A. (2009). The weighted average cost of capital is not quite right. The Quarterly Review of Economics and Finance, 49, 128-138] argues that the standard WACC formula fails to correctly remunerate shareholders and bondholders. This is proved by considering a project yielding a zero net present value. In this comment, we prove that this apparent failure of the standard WACC approach simply stems from the fact that, in Miller's example, the project's debt ratio is implicitly assumed constant throughout the project's life, whereas it is not. We also show that the suggested modified WACC formula is not relevant. More generally, we emphasize that, in any year, a project's debt ratio must be defined with respect to the economic value of the project.
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- Miles, James A & Ezzell, John R, 1985. " Reformulating Tax Shield Valuation: A Note," Journal of Finance, American Finance Association, vol. 40(5), pages 1485-1492, December.
- Linke, Charles M. & Kim, Moon K., 1974. "More on the Weighted Average Cost of Capital: A Comment and Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(06), pages 1069-1080, December.
- Miller, Richard A., 2009. "The weighted average cost of capital is not quite right," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(1), pages 128-138, February.
- Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
- 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.
- Miller, Richard A., 2009. "The weighted average cost of capital is not quite right: Reply to M. Pierru," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1213-1218, August.
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