What counts as "debt" in a company's capital structure?
I'm trying to model out an mid stage tech venture, and the only things that could count as "debt" are a government granted forgivable loan, and some convertible debentures. The government loan is forgivable after 5 or so years if they meet certain targets, but it is secured against all the assets of the company. Do these count as "debt" in a WACC calculation? I understand debt and equity are more of a "spectrum" rather than a binary decision but in wacc there are only two options.
edit: Also, the company is private and only releases financial statements annually, and the last one was issued as of March 31, 2011. In the notes it says they have debentures that are set to expire January 15 2012, so they must have expired or been converted to equity by now right? Should I adjust for this in my wacc formula?
Converts would (in a public company) be debt if the equity price is below the exercise price (i.e., out of the money), otherwise equity. if the government loan is paying interest and hence has a cost, it's debt, regardless of its ability to be forgiven. i, personally, would work under the assumption that it is going to need to be paid back. there may also be some funky tax treatment going on too which needs to be taken into account when multiplying by (1-t) (not from the US, just a thought)
Think what WACC is, it's the cost all the capital employed into the business, split it down into each type of debt, don't be as binary as things are either debt or equity. For example, you'll allocate a separate calc for, finance leases, unsecured debt, preferred stock and for shareholder loans (the treatment of which is depended on their eligibility for tax deductibility)
Is there interest on those loan?
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