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Miller's (2009) WACC model: An extension

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

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    File URL: http://researcharchive.vuw.ac.nz/handle/10063/1995
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    Paper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 1995.

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    Date of creation: 2011
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    Handle: RePEc:vuw:vuwecf:1995
    Contact details of provider: Postal: Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand
    Phone: +64 (4) 463-5353
    Fax: +64 (4) 463-5014
    Web page: http://www.victoria.ac.nz/sef
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    1. 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.
    2. 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.
    3. 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.
    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. 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 435-52, May.
    6. 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.
    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. 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.
    9. Miles, James A & Ezzell, John R, 1985. " Reformulating Tax Shield Valuation: A Note," Journal of Finance, American Finance Association, vol. 40(5), pages 1485-92, December.
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