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On the Weighted Average Cost of Capital: Reply

Published online by Cambridge University Press:  19 October 2009

Raymond R. Reilly  and
William E. Wecker
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Extract

The comment by Linke and Kim correctly observes that the assumption regarding the maintenance of constant proportional use of capital sources is not appropriate for our argument and should be deleted. As our analysis did not make use of this assumption, the two conclusions hold.

1. The weighted average cost of capital calculated with the usual weights (original capital structure proportions) is not in general equal to the discount rate which equates the current value of the firm to the present value of future cash flows.

2. The above conclusion holds for any weights which can be constructed from the cash flows.

Type
Communications
Information
Journal of Financial and Quantitative Analysis , Volume 10 , Issue 2 , June 1975 , pp. 367
Copyright
Copyright © School of Business Administration, University of Washington 1975

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