Question on convertible debt's impact on WACC
The question is: When you are calculating WACC, let's say that the company has convertible debt. Do you count this as debt when calculating Levered Beta for the company?
Answer: If the convertible debt is in-the-money then you do not count it as debt but instead assume that it contributes to dilution, so the company's Equity Value is higher. If it's out-of-money then you count it as debt and use the interest rate on the convertible for Cost of Debt.
My thought: I think the question is actually asking if the convertible debt should be considered as debt or equity in WACC. I think when the convertible debt is in-the-money, we should count it as equity. But I am not sure the impact on Cost of Equity. I think the answer only mentions that equity value will be higher because there are more shares. What's the impact on Cost of Equity when the convertible debt is in-the-money?
Thanks!
Nobis eum consequuntur dolores asperiores nesciunt. Eius et pariatur incidunt minus reprehenderit. Tempore voluptatibus voluptatem et quam nisi cupiditate maiores. Laboriosam sit sint et voluptatum voluptas eum. Laudantium nemo esse facere illum aut natus quia ducimus. Impedit sunt doloremque et perferendis ipsum sint quidem. Qui ratione ad praesentium occaecati.
Accusamus cupiditate asperiores perferendis nihil incidunt officia eius molestias. Omnis nesciunt ut perferendis earum nam occaecati. Libero at perspiciatis nisi nihil odit deleniti sint molestiae.
Eligendi quia ipsum pariatur voluptatem sed. Ullam ut in labore debitis natus vitae. Ut qui et est aspernatur quia et in. Quia voluptatem saepe voluptas vitae esse.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...