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WACC and free cash flows: A simple adjustment for capitalized interest costs

Axel Pierru () and Denis Babusiaux

The Quarterly Review of Economics and Finance, 2010, vol. 50, issue 2, 240-243

Abstract: This paper shows how to value investment projects involving capitalization of interest costs by using the standard WACC method. Whenever capitalized interest costs do not immediately generate proportionate tax shields, one of the assumptions that justify the use of the after-tax weighted average cost-of-capital formula is violated. As an offset to this violation, the project's free cash flows have to be adjusted. We here derive and interpret a simple adjustment formula. A numerical illustration is provided.

Keywords: Capitalized; interest; WACC; APV; Interest; tax; shield; Capitalization (search for similar items in EconPapers)
Date: 2010
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Handle: RePEc:eee:quaeco:v:50:y:2010:i:2:p:240-243