A General Formula for the Wacc: A Correction
6 Pages Posted: 5 Dec 2006
Date Written: December 5, 2006
This paper corrects some equations 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: Suggested Citation