The Correct Formula for the Return to Levered Equity (for Finite Cash Flows with Zero Growth) with Respect to the M&E WACC

Abstract:     
In this note, we show that with respect to the Miles and Ezzell (M&E) Weighted Average Cost of Capital (WACC), the return to levered equity for finite cash flows is constant if the debt-equity ratio is constant. We assume that the reader is familiar with the M&E WACC. The expression that we derive is not new. We hope that our straightforward derivation with simple algebra makes the M&E WACC more widely known.

Number of Pages in PDF File: 8

Keywords: M&E WACC, tax shields

JEL Classification: D61, G31, H43

working papers series