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Browsing by Author "Roush, Melvin L"

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    Miller's (2009) WACC model: An extension
    (Te Herenga Waka—Victoria University of Wellington, 2011) Keef, Stephen P; Khaled, Mohammed S; Roush, Melvin L
    Miller (2009a) presents an analysis of the weighted average cost of capital WACC model. The paper attracts debate which uses a variety of repayment schedules to support the arguments raised. We present an extension of Miller's (2009a) WACC model in a world where interest is tax deductible and debt principal is paid at maturity. We also present the corresponding model for the required rate of return on levered equity which is a vital input to the WACC model. Since these models are unwieldy, we explore an alternative definition of the WACC. These models provide insights into the debate on Miller's (2009a) paper.
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    A note resolving the debate on “The weighted average cost of capital is not quite right”
    (Te Herenga Waka—Victoria University of Wellington, 2011) Keef, Stephen P; Khaled, Mohammed S; Roush, Melvin L
    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.