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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.