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More on the Weighted Average Cost of Capital: A Comment and Analysis

Published online by Cambridge University Press:  19 October 2009

Charles M. Linke  and
Moon K. Kim
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Extract

The mathematical difficulties encountered when attempting to express the internal rate of return (IRR) of a combination of two or more investments as a weighted algebraic sum of the individual investments' IRRs has been recognized in the financial literature for some time. However, in a recent issue of this journal, Professors Reilly and Wecker (hereafter R-W) [3] apply the well-known mathematical impossibility of expressing the root(s) of a polynomial as an algebraic combination of the roots of related polynomials to question the validity of the weighted cost of capital (kw) concept.

Type
Communications
Information
Journal of Financial and Quantitative Analysis , Volume 9 , Issue 6 , December 1974 , pp. 1069 - 1080
Copyright
Copyright © School of Business Administration, University of Washington 1974

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References

REFERENCES

[1]Bodenhorn, Diran. “A Cash Flow Concept of Profit.” Journal of Finance, vol. 19 (March 1964), pp. 16–31.Google Scholar
[2]Jean, William H.The Analytical Theory of Finance. New York: Holt, Rinehart and Winston, 1970.Google Scholar
[3]Reilly, Raymond R., and Wecker, William E.. “On the Weighted Average Cost of Capital.” Journal of Financial and Quantitative Analysis, vol. 8 (January 1973), pp. 123–126.CrossRefGoogle Scholar
[4]Robichek, Alexander A., and Myers, Stewart C.. Optimal Financing Decisions. Englewood Cliffs: Prentice-Hall, Inc., 1965.Google Scholar