A general formula for the WACC: a reply
- Publisher: Centre Emile Bernheim, Bruxelles
Capital; Investment; Capacity | E22 | G30 | G32 | Corporate Finance and Governance: General | value of tax shield. | Economie | WACC; value of tax shield. | WACC | Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Farber, Gillet and Szafarz (2006) propose a general formula for the WACC in which the expected return on the tax shield appears explicitly. The classical Modigliani-Miller and Harris-Pringle WACC formulas for specific debt policies are then derived from the general formula after having determined the corresponding tax shield expected returns. Replying to Fernandez’ (2007) comment, this note explores, in addition, the validity of the general formula in the Miles-Ezzel setup with annual adjustment of the level of debt to maintain a constant market-value debt ratio.