A note resolving the debate on “The weighted average cost of capital is not quite right”

Stephen Keef, Mohammed Khaled () and Melvin L. Roush

The Quarterly Review of Economics and Finance, 2012, vol. 52, issue 4, 438-442

Abstract: Miller (2009a) derives a weighted average cost of capital for the special case where the cash flows to equity and the cash flows to debt are annuities. The paper attracts debate. We show that the weighted average cost of capital is redundant in a world where interest paid is not tax deductible. The required rate of return on unlevered equity will consistently and reliably estimate the net present value of any project no matter the idiosyncratic beliefs of the analyst as to the year-by-year leverage of the project, or of the firm. We recommend that the weighted average cost of capital method is discarded.

Keywords: WACC; Discount rate; Net present value; Leverage (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:52:y:2012:i:4:p:438-442

DOI: 10.1016/j.qref.2012.07.004

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