Why is it that for estimating cost of debt in a DCF the estimate is based on an assumed target capital sructure rather than the actual one (assuming that the target is currently not at its target capital structure)? Is that a general approach or only applied if the plan is to buy the target?
Wouldn't make sense if it's just for valuing a company in order to decide on buying its stock, would it?
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Because you are estimating what the value of the company is in perpetuity, so you need to imagine the company, in the long run, will eventually operate at its most efficient capital structure, rather than what could potentially be circumstantial in the present.
Because investors like to be optimistic.
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