CostCapme

Function Costcapme(rOpp,rD,nTx,dvr)

Calculates Miles and Ezzell's formula for adjusting the weighted average cost of capital for financial leverage. The Miles and Ezzell formula works when the firm adjusts its future borrowing to keep debt proportions constant.

Example

Costcapme(0.14,0.08,0.35,0.5) →  0.1252

Expects

rOpp, rD, nTx, and dvr, all as numbers.

Parameters

rOpp is the opportunity cost of capital;
rD is the expected return on debt;
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

rOpp - (L * rD * Tc * (1 + rOpp)/(1 + rD))

Syntax

Costcapme(rOpp,rD,nTx,dvr:Numeric)

Library

Financial functions

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