A note resolving the debate on â€œThe weighted average cost of capital is not quite rightâ€
Miller (2009a) derives a weighted average cost of capital for the special case where the cash flows to equity and the cashflows to debt are annuities. The paper attracts debate. We show that the weighted average cost of capital is redundant in a world where interest paid is not tax deductible. The required rate of return on unlevered equity will consistently and reliably estimate the net present value of any project no matter the idiocyncratic beliefs of the analyst as to the year-by-year leverage of the project, or of the firm. We recommend that the weighted average cost of capital method is discarded. Our recommendation also applies to a world where interest paid is tax deductible.
|Date of creation:||2011|
|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|
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- 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.
- 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.
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