This page lists recent articles related to corporate finance on this website.
You need the cost of debt and equity to arrive at your WACC. Does the cost of debt and equity change each year? What could be the reason?
We address this question: “Does the cost of equity and cost of debt change in the projected years when arriving at the WACC? Yes/No? And why?”on this page.
It is common practice to use a single WACC to discount cash flows in a DCF model. This assumes that the debt and equity weights remain the same throughout the forecast period (and often into perpetuity). Is this technically correct?
We address, on this page, the question: “Are the debt and equity weights used to estimate WACC the same every year in a DCF valuation model?”
You need the value of debt and equity to arrive at WACC. If a company’s equity is publicly traded, the value of the equity can be computed using the market price of equity. But how do you get the market value of equity if a company’s equity is privately held (not publicly traded)?
We address, on this page, the question: “How do you arrive at the market value of equity in a privately held business to estimate weights (to arrive at WACC)?”
You need the value of debt to arrive at WACC. If a company’s debt is publically traded, the value of the debt can be computed using the market price of the debt. But how do you get the market value of debt if a company’s debt is partly or fully bank debt (not publicly traded)?
On this page, we address the question “How do you get the market value of debt if a company’s debt is partly or fully bank debt (not publicly traded)?”
You are encouraged to always use the market value of debt and equity to arrive at your WACC (as opposed to book value of debt and equity). Do you see any issue or contradiction with using the market value of debt and equity to arrive at your WACC? Even if you have no other option, could there be a theoretical issue?
We explore this question “What could be wrong in using market value weights to arrive at WACC? How can you fix it?” on this page.
Off-balance sheet financing, as the name indicates, is a type of financing. It is more like debt than equity because there is no ownership, and the interest cost is baked into the monthly or quarterly payments being made. What happens to valuation when off balance sheet financing is added to the debt when computing WACC?
Does valuation go up? Or go down? We address this question : “What happens to valuation when off-balance sheet financing is added to the debt?” on this page.
Off-balance sheet financing is used by companies under different circumstances. In your valuation, understanding off-balance sheet financing is important for multiple reasons. Off-balance sheet financing influences the discount rate used in a DCF valuation model – often the WACC. And the WACC has an outsized impact on the value of the business! So, getting the discount rate or WACC right is important. A key ingredient of the WACC computation is the weight of debt. Students are often not sure what is included in debt as there are several ways companies can finance their capital needs including accounts payables, notes payables, off-balance sheet liabilities, collataralization, etc.
We address this question ” Where does off-balance sheet financing figure when computing WACC? Is it considered debt?” on this page.
The discount rate used in a DCF valuation model – often the WACC – has an outsized impact on the value of the business! So, getting the discount rate or WACC right is important. A key ingredient of the WACC computation is the weight of debt. Students are often not sure what is included in debt as there are a number of ways companies can finance their capital needs including accounts payables, notes payables, off-balance sheet liabilities, collataralization, etc.
We address this question “What kinds of liabilities are included in debt when computing the weight of debt (used in computing WACC)?” on this page.
Often, all of us, students and professionals, are tempted to fudge assumptions. We may call it mild terms such as “improving”, “modifying”, etc. to feel better about it. The first assumption we usually tamper with is revenue growth rates! But what can go wrong here? Does increasing the revenue growth rate (not terminal growth rate) increase firm value?
We address this question on this page “Does increasing the revenue growth rate (not terminal growth rate) increase firm value? What could be wrong if you do that?”
The terminal value as a percentage of firm value could be anywhere from 50-80%. Under specific conditions, your terminal value can also be higher than 80% of the firm value. And the terminal value is significantly impacted by the terminal growth rate. Even a little change in the terminal growth rate will result in millions of dollar difference in terminal value. Therefore it is important to get this right.
On this page, we address the question: Should you use the real rates of growth vs. nominal rate of growth when estimating terminal growth rates when using the perpetual growth rate method?