This page lists recent articles related to corporate finance on this website.
We need the market risk premium to arrive at the cost of equity when using the CAPM model. Finance professionals estimate market risk premium by looking at historical returns. Is that appropriate? Is that accurate? Does it serve the purpose?
We examine the appropriateness or inappropriateness of estimating market risk premium by looking at historical returns. by examining this question today: “What are the issues you face in estimating a market risk premium?”
You need the risk free rate to arrive at the WACC or discount rate at which you will discount your cash flows in a DCF valuation model. How will you pick your discount rate?
We address on this page the question: “How would you estimate risk free rate when valuing an international firm?”
The CAPM, Fama-French, APM and multi-factor models methods of estimating the cost of equity are built on assumptions. What are the assumptions? Do these assumptions reflect real-life situations? We examine these models to evaluate if they systematically over estimate or under estimate the cost of equity.
We examine the question: “Do the CAPM, Fama-French, APM and multi-factor models methods of estimating the cost of equity generally overestimate or underestimate the equity cost? Why?”
You need the value of debt and equity to arrive at WACC. This ratio of debt and equity gives you the weights of debt and equity to arrive at WACC. In many cases, the company may have a temporary debt and equity structure. An example is a leveraged buy-out – where excessive amounts of debt is loaded for the LBO transaction. This level of debt is not sustainable and so the company pares down the debt quickly. How do you estimate the “normal” level of debt the company will work towards so you can arrive at the appropriate discount rate? The target debt ratio is the debt ratio that you assume the firms will move towards over time from the current mix of debt and equity.
We address this question today: “What is the target debt ratio of a firm? How do you arrive at it?”
You need the cost of debt and equity to arrive at your WACC. Does the cost of debt and equity change each year? What could be the reason?
We address this question: “Does the cost of equity and cost of debt change in the projected years when arriving at the WACC? Yes/No? And why?”on this page.
It is common practice to use a single WACC to discount cash flows in a DCF model. This assumes that the debt and equity weights remain the same throughout the forecast period (and often into perpetuity). Is this technically correct?
We address, on this page, the question: “Are the debt and equity weights used to estimate WACC the same every year in a DCF valuation model?”
You need the value of debt and equity to arrive at WACC. If a company’s equity is publicly traded, the value of the equity can be computed using the market price of equity. But how do you get the market value of equity if a company’s equity is privately held (not publicly traded)?
We address, on this page, the question: “How do you arrive at the market value of equity in a privately held business to estimate weights (to arrive at WACC)?”
You need the value of debt to arrive at WACC. If a company’s debt is publically traded, the value of the debt can be computed using the market price of the debt. But how do you get the market value of debt if a company’s debt is partly or fully bank debt (not publicly traded)?
On this page, we address the question “How do you get the market value of debt if a company’s debt is partly or fully bank debt (not publicly traded)?”
You are encouraged to always use the market value of debt and equity to arrive at your WACC (as opposed to book value of debt and equity). Do you see any issue or contradiction with using the market value of debt and equity to arrive at your WACC? Even if you have no other option, could there be a theoretical issue?
We explore this question “What could be wrong in using market value weights to arrive at WACC? How can you fix it?” on this page.
Off-balance sheet financing, as the name indicates, is a type of financing. It is more like debt than equity because there is no ownership, and the interest cost is baked into the monthly or quarterly payments being made. What happens to valuation when off balance sheet financing is added to the debt when computing WACC?
Does valuation go up? Or go down? We address this question : “What happens to valuation when off-balance sheet financing is added to the debt?” on this page.