Friday, August 20, 2004

Wd (in WACC formula)

In viewing a recent valuation report, I noticed that the consultant didn't use the actual debt on the balance sheet in the WACC calculation. The percentage debt used was 33.3%, which appears to have been derived from an "ideal" debt to equity ratio of 1:2, although differentiation was not expressed anywhere in the report.

Was this an error, or is this a common practice among valuation consultants?
Thanks!

2 Comments:

Blogger Dumrauf said...

Yes, this is a common practice used by consultants. They argument (¿?) the company will move to the optimal capital structure in the future, which can be different from the current capital structure. In this way, then you can use fixed percentages in the WACC. The problems with this view are two: 1) determining the optimal capital structure and 2)companies don´t change their capital structures very often

6:12 PM  
Anonymous hernando rivas said...

I think the consultant should use the present capital structure

4:01 PM  

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