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A more realistic valuation: APV and WACC with constant book leverage ratio

Pablo Fernandez

No D/715, IESE Research Papers from IESE Business School

Abstract: We value a company that targets its capital structure in book-value terms. This capital structure definition provides us with a valuation that lies between those of Modigliani-Miller (fixed debt) and Miles-Ezzell (fixed market-value leverage ratio). We show that if a company targets its leverage in market-value terms, it has less value than if it targets the leverage in book-value terms. We also present empirical evidence that permits us 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; company valuation; cost of equity (search for similar items in EconPapers)
JEL-codes: G12 G31 G32 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2007-11-07
New Economics Papers: this item is included in nep-acc and nep-cfn
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