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Miller's (2009) WACC model: An extension

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  • Keef, Stephen P
  • Khaled, Mohammed S
  • Roush, Melvin L

Abstract

Miller (2009a) presents an analysis of the weighted average cost of capital WACC model. The paper attracts debate which uses a variety of repayment schedules to support the arguments raised. We present an extension of Miller's (2009a) WACC model in a world where interest is tax deductible and debt principal is paid at maturity. We also present the corresponding model for the required rate of return on levered equity which is a vital input to the WACC model. Since these models are unwieldy, we explore an alternative definition of the WACC. These models provide insights into the debate on Miller's (2009a) paper.

Suggested Citation

  • Keef, Stephen P & Khaled, Mohammed S & Roush, Melvin L, 2011. "Miller's (2009) WACC model: An extension," Working Paper Series 1995, Victoria University of Wellington, School of Economics and Finance.
  • Handle: RePEc:vuw:vuwecf:1995
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    File URL: http://researcharchive.vuw.ac.nz/handle/10063/1995
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    References listed on IDEAS

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    1. Enrique R. Arzac & Lawrence R. Glosten, 2005. "A Reconsideration of Tax Shield Valuation," European Financial Management, European Financial Management Association, vol. 11(4), pages 453-461.
    2. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
    3. Pierru, Axel, 2009. ""The weighted average cost of capital is not quite right": A rejoinder," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1481-1484, November.
    4. Pierru, Axel, 2009. ""The weighted average cost of capital is not quite right": A comment," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1219-1223, August.
    5. 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.
    6. Hamada, Robert S, 1972. "The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stocks," Journal of Finance, American Finance Association, vol. 27(2), pages 435-452, May.
    7. Pierru, Axel & Babusiaux, Denis, 2010. "WACC and free cash flows: A simple adjustment for capitalized interest costs," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(2), pages 240-243, May.
    8. 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.
    9. 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.
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    More about this item

    Keywords

    WACC; Finite life; Discount rate; Tax shield; APV JEL: G31; G32;

    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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