A general formula for the WACC: A correction

Pablo Fernandez ()

No D/663, IESE Research Papers from IESE Business School

Abstract: This paper corrects some of the equations of Farber, Gillet and Szafarz (2006). The WACC is a discount rate widely used in corporate finance. However, correctly calculating the WACC involves properly calculating the value of tax shields, and the value of tax shields depends on the company's debt policy. Many authors [e.g. Inselbag and Kaufold (1997), Booth (2002), Cooper and Nyborg (2006), Farber, Gillet and Szafarz (2006)] have stated that debt policy can only be implemented by maintaining a fixed market-value debt ratio (Miles-Ezzell's assumption) or a fixed dollar amount of debt (Modigliani-Miller's assumption).

Keywords: required return to equity; value of tax shields; company valuation; cost of equity (search for similar items in EconPapers)
JEL-codes: G12 G31 G32 (search for similar items in EconPapers)
Date: 2006-12-16
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