Could someone explain how cash balance affects the WACC?
How would the WACC of a company compare if it has no cash versus if it had a cash balance of $1bn?
My guess is that cash is a part of equity and having a large cash balance would increase the proportion of equity in the capital structure, resulting in a higher WACC, but I am really not sure if I am right.
Would be great if someone could clear it up.
Thanks in advance!
I could see that being the case. I could also see it lowering the debt weight, if the debt used is net debt. Also interested in the correct answer.
When do you use Net Debt for WACC? I've never seen it done.
And you use MV of equity, not BV of equity when looking at capitalization.
So if you didn't know the answer, why chime in and misguide the OP even more?
Cash has no bearing on WACC. If you had 1bil or 1mil, WACC would be the same.
cash is already built into the equity value, so the higher the cash, the higher the value of equity to debt which affects your WACC
unless the cash came from the sale of debt and equity in the same ratio the capital structure was at... but from strictly a cash stand point you cant really say more or less cash is going to affect the WACC.
More cash could increase the creditworthiness of the firm, lowering its interest expense and WACC.
Adding on, more cash would decrease the risk of debt, thus lowering WACC
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