A General Formula for the WACC: A Comment

5 Pages Posted: 6 Sep 2007 Last revised: 14 Oct 2007

See all articles by Pablo Fernandez

Pablo Fernandez

University of Navarra - IESE Business School

Abstract

This note builds on the paper 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).

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

JEL Classification: G12, G31, G32

Suggested Citation

Fernandez, Pablo, A General Formula for the WACC: A Comment. International Journal of Business, Vol. 12, No. 3, 2007. Available at SSRN: https://ssrn.com/abstract=1011661

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/

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