A General Formula for the Wacc

Farber, Andre; Gillet, Roland L.; Szafarz, Ariane

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A General Formula for the Wacc

International Journal of Business, Vol. 11, No. 2, 2006

8 Pages Posted: 27 Apr 2006

See all articles by Andre Farber

Andre Farber

Université Libre de Bruxelles (ULB) - Solvay Brussels School of Economics and Management

Ariane Szafarz

Université Libre de Bruxelles (ULB), Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

Abstract

Recent controversies testify that the tax shield valuation remains a hot topic in the financial literature. Basically, two methods have been proposed to incorporate the tax benefit of debt in the present value computation: The adjusted present value (APV), and the classical weighted average cost of capital (WACC). This note clarifies the relationship between these two apparently different approaches by offering a general formula for the WACC. This formula encompasses earlier results obtained by Modigliani and Miller (1963) and Harris and Pringle (1985).

Keywords: WACC, Adjusted present value, Tax shield, Return on equity

JEL Classification: G30, G32, E22

Suggested Citation: Suggested Citation

Farber, Andre and Gillet, Roland L. and Szafarz, Ariane, A General Formula for the Wacc. International Journal of Business, Vol. 11, No. 2, 2006, Available at SSRN: https://ssrn.com/abstract=898420