A general formula for the WACC
- Publisher: Centre Emile Bernheim, Bruxelles
G31 | Capital Budgeting; Fixed Investment and Inventory Studies | APV | G32 | Economie | WACC | WACC; APV; tax shield | Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure | tax shield
Recent controversies testify that the tax shield valuation remains a hot topic in the financial literature. Basically, two methods have been proposed to incorporate the tax benefit of debt in the present value computation: The adjusted present value(APV), and the classical weighted average cost of capital (WACC). This note clarifies the relationship between these two apparently different approaches by offering a general formula for the WACC. This formula encompasses earlier results obtained by Modigliani and Miller (1963) and Harris and Pringle (1985).