APV and WACC with Constant Book Leverage Ratio

14 Pages Posted: 15 Apr 2007

See all articles by Pablo Fernandez

Pablo Fernandez

University of Navarra - IESE Business School

Date Written: April 13, 2007


We value a company that targets its capital structure in book-value terms. This capital structure definition provides us with a Value of Tax Shields that lies between those of Modigliani-Miller (fixed debt) and Miles-Ezzell (fixed market-value leverage ratio). If a company targets its leverage in market value terms, has less value than if it targets the leverage in book value terms. How could some manager target leverage in market value terms? We also present empirical evidence that permits 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, M41

Suggested Citation

Fernandez, Pablo, APV and WACC with Constant Book Leverage Ratio (April 13, 2007). Available at SSRN: https://ssrn.com/abstract=980265 or http://dx.doi.org/10.2139/ssrn.980265

Pablo Fernandez (Contact Author)

University of Navarra - IESE Business School ( email )

Camino del Cerro del Aguila 3
28023 Madrid
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

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