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A Little More on the Weighted Average Cost of Capital

Published online by Cambridge University Press:  19 October 2009

Extract

In a recent issue of this journal, Linke and Kim [1], hereafter denoted as L-K, have shown that for finite-time horizons in excess of one period and if, over the same period, the firm's ratio of debt to equity is held constant, the firm's overall required rate of return could be expressed as a weighted average cost of capital. In their proofs L-K distinguish between firms engaging in no financing over the relevant horizon (the nonfinancing case), and those in which such financing is permitted to take place. In the latter case, their procedure is to derive proofs for new debt and equity financing cases separately. In all cases their proofs are correct. However, we wish to draw attention to an implied restriction which must hold in order for their proofs in the financing cases to be valid. Our objective is to set forth a proof which allows both new debt and equity financing simultaneously, and most importantly, which is also free of the implied restriction.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1975

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References

REFERENCES

[1]Linke, C. M., and Kim, M. K.. “More on the Weighted Average Cost of Capital. A Comment and Analysis.Journal of Financial and Quantitative Analysis, September 1974.CrossRefGoogle Scholar