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A general formula for the WACC


  • André Farber
  • Roland Gillet
  • Ariane Szafarz


Recent controversies testify that the tax shield valuation remains a hot topic in the financial literature. Basically, two methods have been proposed to incorporate the tax benefit of debt in the present value computation: The adjusted present value(APV), and the classical weighted average cost of capital (WACC). This note clarifies the relationship between these two apparently different approaches by offering a general formula for the WACC. This formula encompasses earlier results obtained by Modigliani and Miller (1963) and Harris and Pringle (1985).

Suggested Citation

  • André Farber & Roland Gillet & Ariane Szafarz, 2005. "A general formula for the WACC," Working Papers CEB 05-012.RS, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:05-012

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    References listed on IDEAS

    1. Jacques Chrissos & Roland Gillet, 2016. "Décision d'investissement," ULB Institutional Repository 2013/244421, ULB -- Universite Libre de Bruxelles.
    2. Fernandez, Pablo, 2004. "The value of tax shields is NOT equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 73(1), pages 145-165, July.
    3. Jacques Chrissos & Roland Gillet, 2008. "Décision d'investissement," ULB Institutional Repository 2013/14363, ULB -- Universite Libre de Bruxelles.
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    Cited by:

    1. repec:gam:jsusta:v:11:y:2019:i:8:p:2328-:d:223932 is not listed on IDEAS
    2. Fernandez, Pablo, 2006. "A general formula for the WACC: A correction," IESE Research Papers D/663, IESE Business School.
    3. André Farber & Roland Gillet & Ariane Szafarz, 2007. "A general formula for the WACC: a reply," ULB Institutional Repository 2013/6061, ULB -- Universite Libre de Bruxelles.
    4. Fernandez, Pablo, 2007. "A more realistic valuation: APV and WACC with constant book leverage ratio," IESE Research Papers D/715, IESE Business School.
    5. Fabrizio Cacciafesta, 2015. "Using the WACC to rate a new project," CEIS Research Paper 339, Tor Vergata University, CEIS, revised 10 Apr 2015.
    6. repec:gam:jsusta:v:10:y:2018:i:5:p:1450-:d:144928 is not listed on IDEAS
    7. repec:spt:fininv:v:6:y:2017:i:3:f:6_3_2 is not listed on IDEAS
    8. Christian Koziol, 2014. "A simple correction of the WACC discount rate for default risk and bankruptcy costs," Review of Quantitative Finance and Accounting, Springer, vol. 42(4), pages 653-666, May.
    9. repec:gam:jsusta:v:10:y:2018:i:7:p:2140-:d:153986 is not listed on IDEAS
    10. Tomáš Buus, 2014. "Cost of Financial Distress in the Cash Flow Model of Capital Structure," Český finanční a účetní časopis, University of Economics, Prague, vol. 2014(3), pages 46-58.

    More about this item


    WACC; APV; tax shield;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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