A General Formula for the WACC: A Correction
University of Navarra - IESE Business School
December 5, 2006
This paper corrects some equations of Farber, Gillet and Szafarz (2006). The WACC is a discount rate widely used in corporate finance. However, the correct calculation of the WACC rests on a correct valuation of the tax shields. The value of tax shields depends on the debt policy of the company. Many authors, (e.g. Inselbag and Kaufold (1997), Booth (2002), Cooper and Nyborg (2006), Farber, Gillet and Szafarz (2006)) consider that debt policy may only be framed in terms of maintaining a fixed market value debt ratio (Miles-Ezzell assumption) or a fixed dollar amount of debt (Modigliani-Miller assumption).
Number of Pages in PDF File: 6
Keywords: WACC, required return to equity, value of tax shields, company valuation, APV, cost of equity
JEL Classification: G12, G31, G32
Date posted: December 5, 2006
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.282 seconds