A More Realistic Valuation: APV and WACC with Constant Book Leverage Ratio

Fernandez, Pablo

doi:10.2139/ssrn.946090

Abstract

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A More Realistic Valuation: APV and WACC with Constant Book Leverage Ratio

Pablo Fernandez

University of Navarra - IESE Business School

November 1, 2007

IESE Business School Working Paper No. 715

Abstract:
We value a company that targets its capital structure in book - value terms. This capital structure definition provides us with a valuation that lies between those of Modigliani - Miller (fixed debt) and Miles - Ezzell (fixed market - value leverage ratio).

We show that if a company targets its leverage in market - value terms, it has less value than if it targets the leverage in book - value terms. We also present empirical evidence that permits us to conclude that debt is more related to the book - value of the assets than to their market - value.

Number of Pages in PDF File: 15

Keywords: value of tax shields, required return to equity, WACC, company valuation, APV, cost of equity

JEL Classification: G12, G31, G32

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Date posted: November 21, 2006 ; Last revised: June 19, 2012

Suggested Citation

Fernandez, Pablo, A More Realistic Valuation: APV and WACC with Constant Book Leverage Ratio (November 1, 2007). IESE Business School Working Paper No. 715. Available at SSRN: http://ssrn.com/abstract=946090 or http://dx.doi.org/10.2139/ssrn.946090

Contact Information

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/