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A More Realistic Valuation: APV and WACC with Constant Book Leverage Ratio

15 Pages Posted: 21 Nov 2006 Last revised: 19 Jun 2012

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: November 1, 2007

Abstract

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.

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

JEL Classification: G12, G31, G32

Suggested Citation

Fernandez, Pablo, A More Realistic Valuation: APV and WACC with Constant Book Leverage Ratio (November 1, 2007). IESE Business School Working Paper No. 715. Available at SSRN: https://ssrn.com/abstract=946090 or http://dx.doi.org/10.2139/ssrn.946090

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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