APV and WACC with Constant Book Leverage Ratio
University of Navarra - IESE Business School
April 13, 2007
We value a company that targets its capital structure in book-value terms. This capital structure definition provides us with a Value of Tax Shields that lies between those of Modigliani-Miller (fixed debt) and Miles-Ezzell (fixed market-value leverage ratio).
If a company targets its leverage in market value terms, has less value than if it targets the leverage in book value terms. How could some manager target leverage in market value terms? We also present empirical evidence that permits 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: 14
Keywords: value of tax shields, required return to equity, WACC, company valuation, APV, cost of equity
JEL Classification: G12, G31, G32, M41
Date posted: April 15, 2007
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