A General Formula for the Wacc
8 Pages Posted: 27 Apr 2006
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