WACC approach and Nonconstant Leverage Ratio

Nowadays, every textbook on corporate finance uses the WACC approach for valuatingtax savings on interest rates. This approach, going back to Miles and Ezzell (1980), stilllacks the restriction of a constant leverage ratio. In this paper it is shown how the WACC formula has to be modified for an arbitrary, butdeterministic leverage ratio. Furthermore, it is shown that the original proof of Miles andEzzell contained two flaws and was incomplete. Finally, we extend the WACC formula toa time continuous setup.