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

Stephen P Keef, Mohammed S Khaled and Melvin L Roush

No 18609, Working Paper Series from Victoria University of Wellington, School of Economics and Finance

Abstract: Miller (2009a) derives a weighted average cost of capital for the special case where the cash flows to equity and the cashflows 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 idiocyncratic 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. Our recommendation also applies to a world where interest paid is tax deductible.

Keywords: WACC; finite life; discount rate; net present value; leverage (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwecf:18609

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