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The Weighted Average Cost of Capital as a Cutoff Rate: A Critical Analysis of the Classical Textbook Weighted Average

Financial management, 1977-10, Vol.6 (3), p.24-34 [Peer Reviewed Journal]

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Title:
The Weighted Average Cost of Capital as a Cutoff Rate: A Critical Analysis of the Classical Textbook Weighted Average
Author: Arditti, Fred D. ; Levy, Haim
Subjects: Analysis ; Average ; Average cost ; Capital ; Capital costs ; Capital structure ; Cash flow ; Cost control ; Cost of equity ; Debt ; Debt to equity ratio ; Decision making ; Dividends ; Investments ; Net present value ; Return on investment ; Tax benefits ; Taxes ; Textbooks ; Weighted averages
Is Part Of: Financial management, 1977-10, Vol.6 (3), p.24-34
Description: This paper demonstrates that most finance textbooks may incorrectly define a project's cash flow and the cost of capital. These two mistakes precisely cancel each other in the case of a perpetuity and zero net present value. Since businessmen are dealing in general with projects with non-zero net present value and in particular with a finite economic life, however, the two mistakes do not cancel each other, which may lead the firm to the wrong accept-reject decision.
Publisher: Albany, N.Y: Financial Management Association
Language: English
Identifier: ISSN: 0046-3892
EISSN: 1755-053X
DOI: 10.2307/3665253
Source: ProQuest Central

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