cost of capital for a company with no cash equity
theoretical question for you guys, say you have a private company that has no cash equity but 5x debt at 10%.
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Are you asking about a firm that has zero equity?
that's right
I don't know what a company with no equity is, but I imagine the rate on that debt would be astronomical.
well i mean a PE firm took out a special dividend so they have no cash equity left in the business.
But since you're looking at a private company, you're going to be comping CoE / WACCs anyway.
right the option value. i guess you can value that on a option pricing model.
You're thinking way too textbooky about this.
I guess what you are saying is that the company had equity (on the books, in the BS) before, but then it has made so much losses recently that its negative retained earnings cancels out its paid in capital?
In this case, a company should not be able to (depending on the relevant company law in whatever country this is in) pay out any dividends. You can't generally pay dividends on negative retained earnings, so I am not sure how they would pay this special dividend.
If this company is the way that I think it is, you could approximate an equity value through other means, such as multiples, and use that as the equity value in the WACC formula.
If it is making losses now and has a terrible capital structure, but you expect it to make profits later, I would also suggest you run a rolling WACC based on each year's (or each quarter's) evolving estimated capital structure, rather than running the whole model with one single WACC.
Although, honestly, this is a bullshit question as it is unclear wtf you are talking about.
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