A More Realistic Valuation: APV and WACC with Constant Book Leverage Ratio
University of Navarra - IESE Business School
November 1, 2007
IESE Business School Working Paper No. 715
We value a company that targets its capital structure in book - value terms. This capital structure definition provides us with a valuation that lies between those of Modigliani - Miller (fixed debt) and Miles - Ezzell (fixed market - value leverage ratio).
We show that if a company targets its leverage in market - value terms, it has less value than if it targets the leverage in book - value terms. We also present empirical evidence that permits us 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: 15
Keywords: value of tax shields, required return to equity, WACC, company valuation, APV, cost of equity
JEL Classification: G12, G31, G32
Date posted: November 21, 2006 ; Last revised: June 19, 2012