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THE WEIGHTED AVERAGE COST OF CAPITAL: SOME QUESTIONS ON ITS DEFINITION, INTERPRETATION, AND USE

THE WEIGHTED AVERAGE COST OF CAPITAL: SOME QUESTIONS ON ITS DEFINITION, INTERPRETATION, AND USE S= D= i= r= market value of common stock at instance of w calculation. market value of debt at instance of w calculation. yield on debt, hereafter called the interest rate. expected or required rate of return on common stock. (1) The actual process of finding the optimal capital structure involves a search for the minimum of the function relating w to ( D ), the debt portion of the firm's capital," S D * University of Florida, Gainsville. Financial support from the University of Florida and the helpful comment of Haim Levy are gratefully acknowledged. 1. Cf. [2] pp. 148 and 165-66, [5] pp. 254 and 256-58, and [11] pp. 301 and 313-14. 2. Finance texts will sometimes refer to an alternative to the above weighting scheme, namely the insertion of the book values of the firm's equity and debt for Sand D in equation (1). However, this alternative weighting scheme is usually rejected in favor of weights determined by market values, because, as the argument goes, the former reflects a past capital structure rather than the present one (Cf. [10] pp. 106-8 and [11] pp. 316-17). The questions posed by the substitution of book values for http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

THE WEIGHTED AVERAGE COST OF CAPITAL: SOME QUESTIONS ON ITS DEFINITION, INTERPRETATION, AND USE

Arditti, Fred D.
The Journal of Finance , Volume 28 (4) – Sep 1, 1973
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References (4)

Publisher
Wiley
Copyright
1973 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1973.tb01422.x
Publisher site
See Article on Publisher Site

Abstract

S= D= i= r= market value of common stock at instance of w calculation. market value of debt at instance of w calculation. yield on debt, hereafter called the interest rate. expected or required rate of return on common stock. (1) The actual process of finding the optimal capital structure involves a search for the minimum of the function relating w to ( D ), the debt portion of the firm's capital," S D * University of Florida, Gainsville. Financial support from the University of Florida and the helpful comment of Haim Levy are gratefully acknowledged. 1. Cf. [2] pp. 148 and 165-66, [5] pp. 254 and 256-58, and [11] pp. 301 and 313-14. 2. Finance texts will sometimes refer to an alternative to the above weighting scheme, namely the insertion of the book values of the firm's equity and debt for Sand D in equation (1). However, this alternative weighting scheme is usually rejected in favor of weights determined by market values, because, as the argument goes, the former reflects a past capital structure rather than the present one (Cf. [10] pp. 106-8 and [11] pp. 316-17). The questions posed by the substitution of book values for

Journal

The Journal of Finance – Wiley

Published: Sep 1, 1973

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