Proof of Using Ku or WACC without Debt Tax Shield

This article demonstrates without considering a tax shield on interest, use of WACC or use of the un-levered cost of equity produces correct valuation of a corporation. The proof is demonstrated by constructing a long-term model where the debt to capital ratio is maintained at the level consistent with the assumption in the WACC or un-levered cost of equity.  When the cash flow components are discounted at rates consistent with cost of capital in the WACC, the discounted cash flow of interest payments, new debt issues and equity flows are the same as amounts in the assumed capital structure.  Working through this example carefully is essential as a foundation for discussion for valuation of the tax shield provided by the interest expense.