How To Determine Long-Run Target Capital Structure for WACC/DCF
How do you determine the long-run target capital structure for a wacc or dcf analysis? If you could provide an example with a real company that would be heplful
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You don't, because there's no reliable way to know, so you just assume that the current structure is optimal, unless the company has announced its intention to modify it.
Ok that makes sense. Then why is it even referred to as the "target" capital structure if you're going to be using the current capital structure anyway? Is it just so in the case of if companies announce their intentions to modify the capital structure?
Typically you will also look at cap structures of public comparables to see if there is a significant difference between those and the target. If so, you typically use use the average or median capital structure of public comparables. Same thing for a private company. Most of the time though you just use the current capital structure (for public targets) because you assume the cap structure they are using is done to maximize shareholder value.
Awesome thank you. To find out if a company will be targeting/changing their capital structure will this be something that is directly stated in the 10-k or is this something that is announced on something like earning calls. If it is in the 10-k do you know which sections I should look for to find out this info?
It might be in the 10-K under MD&A, which will state long term goals for cap structure. However, more often the company gives guidance on what they expect the long term cap structure to be in the form of financial projections(think sell side M&A process).
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