When acquiring a target with 80% of debt, is this the capital structure that should be used in the wacc calculation given that the funding is mostly debt? In another term do we reflect the deal financing structure in the wacc or the target’s current capital structure?
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You don't use WACC in LBO models. If you have a target equity return then discount the levered FCF with that to find max equity check to generate that required return.
While the poster above is right that you don’t use WACC in an LBO, it is still helpful to think conceptually about it as it actually came up in a PE interview I did. The answer is yes, the WACC is calculated using the 80% weighting and the cost of debt. Just remember the remaining cost of equity is the IRR the fund is targeting, which is basically the cost that the LBO TargetCo needs to take on in order to use your capital as the equity portion.
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