"The weighted average cost of capital is not quite right": A comment

Axel Pierru

The Quarterly Review of Economics and Finance, 2009, vol. 49, issue 3, pages 1219-1223

Abstract: In this journal, Miller [Miller, R. A. (2009). The weighted average cost of capital is not quite right. The Quarterly Review of Economics and Finance, 49, 128-138] argues that the standard WACC formula fails to correctly remunerate shareholders and bondholders. This is proved by considering a project yielding a zero net present value. In this comment, we prove that this apparent failure of the standard WACC approach simply stems from the fact that, in Miller's example, the project's debt ratio is implicitly assumed constant throughout the project's life, whereas it is not. We also show that the suggested modified WACC formula is not relevant. More generally, we emphasize that, in any year, a project's debt ratio must be defined with respect to the economic value of the project.

Keywords: WACC; Cost; of; capital; Debt; ratio; Leverage; ratio (search for similar items in EconPapers)
Date: 2009

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