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We need the values of debt and equity to estimate the cost of capital and WACC. The book values of debt and equity are easier to obtain. But note that we ideally want the market values of debt and equity and not the book values of debt and equity. Why?
What are the drawbacks of using book values in computing the weights of capital?
Risk is a given in any investment. It is incorporated into valuation in the cost of equity and debt which flows into the discount rate. International projects are considered higher risk given the potential for political and/or currency fluctuations. Therefore a risk premium is added for international projects.
We look at the question: “Are country risk premiums a one time task or does it need to be revised frequently?” on this page.
There are different methods of estimating the cost of equity do you use. You must know more than one and why you are picking the one you use.
We address this question: Which method of estimating the cost of equity do you use? Why?
The weight of debt and equity are important components of the WACC. The WACC which you use as your discount rate in most DCF models plays a big role in the resulting valuation. It is important to get this right. Would you prefer to use the market value weights or book value weights of debt and equity to arrive at the weights when computing WACC?
We address this question here on this page: “Do you use market value weights or book value weights of debt and equity to arrive at the weights when computing WACC?