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A general formula for the WACC

Author

Listed:
  • André Farber
  • Roland Gillet
  • Ariane Szafarz

Abstract

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).
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • André Farber & Roland Gillet & Ariane Szafarz, 2006. "A general formula for the WACC," ULB Institutional Repository 2013/6059, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/6059
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    References listed on IDEAS

    as
    1. Roland Gillet & Jacques Chrissos, 2003. "Décision d'investissement," Post-Print hal-03934673, HAL.
    2. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    3. Jacques Chrissos & Roland Gillet, 2008. "Décision d'investissement," ULB Institutional Repository 2013/14363, ULB -- Universite Libre de Bruxelles.
    4. Fernandez, Pablo, 2004. "Reply to "The value of tax shields is equal to the present value of tax shields"," IESE Research Papers D/576, IESE Business School.
    5. Robert S. Harris & John J. Pringle, 1985. "Risk-Adjusted Discount Rates-Extensions From The Average-Risk Case," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 8(3), pages 237-244, September.
    6. 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.
    7. 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(3), pages 719-730, September.
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    More about this item

    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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