WACC - negative equity

How do I calculate WACC for a company with negative equity value?

It's a private company, so when proportion of equity * cost of equity will be negative right?

Can someone please clarify?

Comments (11)

Nov 30, 2018 - 8:46pm
Lifestylemna, what's your opinion? Comment below:

A few thoughts:

  • For valuation purposes, it sounds like this company is distressed, so a DCF-derived value might not be appropriate. Liquidation value perhaps?
  • WACC should be calculated using the long-term capital structure of the company. Any guidance from management? If not, perhaps use a comp set
Nov 30, 2018 - 9:00pm
Esuric, what's your opinion? Comment below:

It's a private company, so how do you know it has negative equity value? Are you referring to book value?

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Most Helpful
Dec 1, 2018 - 6:46am
MonkeySeeMonkeyDo23, what's your opinion? Comment below:

By the 25% EBITDA margin and the negative net income, I'm assuming it has huge interest payments leading to that figure?

What Lifestylemna said above is correct, you use a long term capital structure for the proportion of debt to equity so there's no problem there. You can use a DCF if eventually the FCF becomes positive by your terminal year. Also you should be using the market value of the equity instead of the book value in cases of potentially distressed companies (market value can't be negative by definition as the limit to # of shares and share price is 0). All of these things should give you a WACC and FFCF's that you can work with for a DCF valuation.

Alternatively, you could look at the distressed valuation of the company and its assets.

Dec 1, 2018 - 8:32am
Winnfield, what's your opinion? Comment below:

Doesn't make sense for it to be in negative equity just because they issued a bond.

Liabilities go up (LT debt) but there is an equal cash inflow.

What'd they do with all that cash?

Unless they literally burnt it (or spent it on hookers and blow), it should still be somewhere on the asset side. Even if they bought a dorm room with it, the asset value is still there.

Something's missing in the story.

The truth is you're the weak. And I'm the tyranny of evil men. But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd.
  • 1
Dec 1, 2018 - 12:12pm
MonkeySeeMonkeyDo23, what's your opinion? Comment below:

I'm assuming the OP has misdiagnosed the reason behind the negative Shareholder's Equity as the new bond issuance rather than the interest payments taking a large hit on cashflow

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Apr 10, 2020 - 3:24pm

What's the best approach for estimating cap structure for a private company? Average of debt / equity ratio for public comps? Do you need to know the company's debt profile to be able to use the equity value you back out from your DCF?

Apr 10, 2020 - 3:50pm
Donnie Azz, what's your opinion? Comment below:

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