How to calculate equity / debt weight in the WACC
For a DCf, how do you calculate the equity and debt weights/ratio for the WACC formula. On google it just says to either take the current weightage/capital structure or take the optimal structure but it doesn't explain how to calculate each of these and also doesn't explain what do for a public or private company. (Some links may explain it but not in an easy to understand way so would appreciate any guidance from those reading this).
1) public: I assume for a public company you would divide the market cap by the enterprise value to give you your equity weight for the WACC?
2) private company: would you check the balance sheet and do shareholder equity divided by shareholder equity plus debt to give the equity weight?
thank you
You wouldn't just divide market cap by enterprise value because EV is net of cash. You can use market cap as the market value of equity, but you'd have to find the amount of debt by looking in the balance sheet under long term liabilities plus any current portion of debt in current liabilities.
So it would be % Equity = MktCap/(MktCap + Current Debt + Long Term Debt) and % Debt = (Current Debt + Long Term Debt)/(MktCap + Current Debt + Long Term Debt).
The concept is the same for both public and private companies, but for private companies you'd just have to dig deeper to figure out what the equity is valued at.
Edit: I want to clarify, when I said that EV is net of cash, I mean that EV is generally (MktCap + Long Term Debt + Short Term Debt - Cash). The (Debt - Cash) part is sometimes referred to as "net debt." There are sometimes a few other additions to the EV calculation such as minority interest (which is just shares of subsidiaries which are on the parent company's balance sheet) and preferred stock which would make the full formula (MktCap + Minority Interest + Preferred Stock + Long Term Debt + Current Debt - Cash), so now you can really see why you can't just divide MktCap by EV to find the percent equity.
Thank you this is helpful. So how would you go about finding the equity value of a private company from looking at their financial statments?
For a private company, it gets trickier. Here's a link to some useful slides from the god of finance himself, Damodaran from NYU. http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/pvt.pdf
Basically, you can take an average D/E ratio from a set of comparables. I'd suggest taking a flip through all the slides since it's some good stuff.
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