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A General Formula for the WACC: A Correction

6 Pages Posted: 5 Dec 2006  

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: December 5, 2006

Abstract

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

Fernandez, Pablo, A General Formula for the WACC: A Correction (December 5, 2006). Available at SSRN: https://ssrn.com/abstract=949464 or http://dx.doi.org/10.2139/ssrn.949464

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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