Why we have to use target capital structure?
Why do we have to use target capital structure? , why don't we use current capital structure?........
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Current gives you current value (of tax shield), target gives you a target value. Depends on risk appetite of current/new owner. If you have a target, but never reach it, then actual makes more sense.
Using target capital structure gives you a cleaner valuation, undistorted by the possibility that the company may have financed itself under conditions that no longer prevail. It also contemplates the near certain likelihood that on a change of control the company will need to be fully - and optimally - recapitalized.
Imagine if you are one of two private equity funds bidding on a company, and neither your fund nor the other one has a unique strategic angle or synergies. To avoid over- or under-paying, you want your bid to reflect the cost of capital that you or the other buyer will actually bear once you own it.
You haven't indicated the context of your analysis. But in general, why would I care what the capital structure was?
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