Published in WILMOTT MAGAZINE, Nov/Dec 2004, pp. 86-95

Visitor number 99738 as of September 6, 2001

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An Analytical Process for Generating the WACC Curve and Locating the Optimal Capital Structure

Ruben D. Cohen (e-mail)

Abstract


We present here an analytical process for generating the firm's value [FV] and the weighted-average cost of capital [WACC] curves, with intent to locate the optimal capital structure. The method takes into consideration the relationship between debt, equity and taxes, and places emphasis on the effects of default risk, as well as on the assumptions that underlie the curves. In relation to the proposed approach, it is shown that the conventional one, which is more commonly used in practice, is flawed.

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