The target structure of the capital of the WACC corporation
At present, among scientists and practitioners, it is widely believed that in many cases when calculating WACC for the company is more appropriate to use not the actual, but the target structure of its capital.
The target structure of capital is the optimal proportion of each type of capital in the total capital of the corporation, to which it could claim, based on its credit rating, industry and individual business conditions.
The logic is that even if the managers of the company in a particular period do not use any opportunities to optimize the capital structure, this should not affect the value of the company as a whole, which, for example, we would like to acquire and change the structure capital, change the management team.
If we take this approach, it is all the more understandable why the structure and cost of capital of a company or project should not be adjusted in the budget every year: the repayment of the old debt makes it possible to borrow a new one and thereby support the target (theoretical, not actual) capital structure .
Unfortunately, there are no formal methods for assessing the target structure of capital. In practice, this issue is solved as follows:
• Estimate the maximum debt that a company can claim, believing that according to the Modigliani-Miller theory the company should take as much debt as the lender allows. This maximizes its value;
• or believe that the actual structure of capital that has developed in this successful company is close to the target one;
• either take the industry-average market proportions for the calculation of ISSS
Such data is for the global market (Table 2.7.1). For the emerging markets of the former USSR, there is no such statistics.
TABLE 2.7.1. The market structure of capital, characteristic of various industries and activities
In order to correctly evaluate the project, it is necessary to decide which estimation method should be used as a basis for calculations: use the cash flow from assets and the weighted average cost of capital (method NoAC) or residual flow and the cost of equity (the Ey method yields a result that more closely matches the specific terms of the debt provision.) The I/4 Method is focused on maintaining the specified capital structure.
The estimation of the weighted average cost of capital for a project economically integrated into an operating enterprise is carried out in different ways depending on how large the project budget is relative to the company's budget as a whole and whether the project is typical for the company or belongs to a particular type of activity that is not characteristic for the enterprise.
In theory, a change in the financial leverage in the course of project implementation should lead to the fact that at each stage of its implementation the weighted average cost of capital should have changed.
However, due to the fact that the debt repayment schedule is still unknown with the use of the I/DSS method, it is impossible to predict how the ratio between the project's own and borrowed capital will vary. Therefore, the rate of the discount to change from year to year is in most cases impractical (unless the change in the structure of capital is a strategic goal of the corporation).
The WACC method with this campaign will determine whether the investor will be able to obtain from the project's cash flows the yield ke, and the lender - the rate to & amp;
The greatest difficulties in calculating the weighted average cost of capital of an enterprise or project arise in the developing US market in connection with:
• with the absence of representative quotations of shares and bonds of companies and, accordingly, the unreliability of estimates of market value and the amount of capital;
• the need to account for commissions and other payments related to obtaining capital;
• the limited nature of the tax bill for interest on debt.
The following situation 2.15 in many respects generalizes the material of the whole Ch. 2.
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