Cost of capital: spot rate or forward rate?

H. Qi, Y. A. Xie

Research output: Contribution to journalArticlepeer-review


In this study, we intend to reveal some problems with the classic valuation method – the weighted average cost of capital (WACC) method. We first address a fundamental question about WACC, that is, should WACC be interpreted as a spot rate, a forward rate or any kind of average of either of them? We show that the nature of WACC is the expected forward rate. We next demonstrate that without understanding this nature, we may misinterpret the famous MM formula and MM Proposition II, as well as develop incorrect valuation framework. Our findings provide insightful implications to academia and practitioners for the proper interpretation and implementation of the WACC method.

Original languageEnglish (US)
Pages (from-to)3804-3811
Number of pages8
JournalApplied Economics
Issue number40
StatePublished - Aug 26 2016
Externally publishedYes


  • APV
  • Capital structure
  • WACC
  • forward rate
  • spot rate

ASJC Scopus subject areas

  • Economics and Econometrics


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