CostCapmm

Function Costcapmm(rAllEq, nTx, dvr)

Calculates Modigliani and Miller's formula for adjusting the weighted average cost of capital for financial leverage. Modigliani and Miller's formula works for any project that is expected to:

1. generate a level, perpetual cash-flow and
2. support fixed permanent debt

Example

costcapmm(0.2,0.35,0.4) → 0.172

Expects

rAllEq, nTx, dvr all to be numeric

Parameters

rAllEq is the cost of capital under all-equity financing;
nTx is the net tax saving per dollar of interest paid. This is difficult to pin down in practice and is usually taken as the corporate tax rate;
dvr is the debt-to-value ratio

Function definition

rAllEq * (1 - (nTx * dvr))

Syntax

Costcapmm(rAllEq, nTx, dvr : Numeric)

Library

Financial library functions

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