I'm looking at a company whose shareholder's equity is 0 thanks to a long history of losses (retained earnings is very negative).
How can I determine a WACC for this? The D/E is negative. At this point do I just start assuming an ideal D/E ratio from loosely-related comps?
Thanks for your help.
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I'd actually like to know this myself..bump
You're supposed to use the market value of equity.
For debt, you're also supposed to use the market value, but book value is often used because it's a good proxy (for equity, book value is not a good proxy).
I am using market value of equity and market value of debt.
Market value of equity can't be less than zero, where are you getting the number from? There are some situations where the enterprise value can be negative (i.e. the value of net cash is greater than the equity), but those are rare and there's always a reason why that is the case...
Btw, a market value of equity can't be less than zero because that would imply a share price less than zero...
Market value of equity = 0 because the shares don't trade. They're publicly listed in Nevada, but the shares are illiquid, privately held, and have no resale value. Retained earnings is well below 0. That's why equity value is 0...am I being unreasonable?
would like to know myself
Common practice is to 1. use industry or peer average capital structures 2. Determine an optimal capital structure based on the company's past, its peers (similar to 1) or an acquirer in an M&A transaction.
^ was about to post something very similar to what GJones said.
Sucks that you have to do this for a private company...
Equity value can be zero if a company is bankrupt, but it can't be less than zero...
I would go with what GJones said if you have no info on which to get an equity value. I would not assume zero. The equity has to have some value or else the company is bankrupt...
Are you doing this for work or school? If for work, then you can just model out the cash flows and calculate an IRR, almost no one uses WACC for real work...it's more of an academia thing...
Answered my own question with some help from you folk:
Assets = Liabilities + shareholder's equity. In this company Liabilities = $30m. Assets= $16m. Owner's equity = $14m. In particular, owner's equity has $4m in paid-in capital and -$18m in retained earnings. I guess this is the book value of equity, and that can be negative.
The market value is unknown because the shares don't trade and don't have a price. There is no market. You can use a waterfall to determine what the share prices will be at certain valuations, but linking the EV to share price and share price to EV will be recursive and a pain.
I just ended up using the industry's D/E ratio (which, by the way, is THIRTY. 30.) and calculated the EV.
How does someone use IRR to determine the enterprise value of a company?
Obviously tremendously old, but in case someone stumbles across this, with IRR and WACC it's implicitly the same result, just an issue of perspective.
if this is for work, quit and find a new job.
WACC and negative equity - please help! (Originally Posted: 10/19/2017)
Hello, At first, I want to excuse for my weak English (I’m a foreigner student). On my course, I have to find an information, how to solve a problem with WACC. How WACC should have been computed, when Equity is negative? I have a problem with that, because the company is “Ltd.” – I am able to sum up the WACC, when company is “Joint- stock company”. I would be very grateful for your answers.
Use weights in WACC with a target capital structure in place in line with the industry. I think that will work.
Can't you just go with multiples?
if you think there are losses accruing past the point where the common zeroes, charge it to the preferred or the most junior debt tranche (here market value of debt can defer from book value quite drastically).
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