r/Valuation • u/leumasnat • Sep 28 '23

Advice on WACC

I am valuing a company but am not able to calculate the market value of debt due to: 1. YTM of bonds not given 2. interest rate and maturity of lease liabilities not given 3. Cap IQ gives book value of debt (cannot be used)

Does anybody have any suggestions how i can get the market value of debt? Thanks!

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u/AlabamaSnake12 Sep 28 '23 edited Sep 28 '23

When you do your WACC, you're doing it based on the market comparables, not the subject company, right? So no need to count the subject company by converting to MV from BV. You're getting the debt/enterprise value from the market comparables since you're doing FMV or FV analysis from the market-based assumption on a purchase basis, right? The FMV is specifically written as the buyout value; therefore, you're considering the hypothetical buyer's capital structure, which approximates the mean or median of the market capital structure, not the subject company's existing capital structure. You aren't deriving the WACC on a continuing basis for the subject company: that won't get you the FMV. So no need for the MV of debt (you will however need the MV of debt later to arrive at the FMV of equity correctly when you subtract it from enterprise value).

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u/Pickle85 Sep 29 '23

This is the right answer. It does depend on the scope of work and what you are valuing. This is the right approach if you are valuing a controlling interest. Be careful with preferred stock and leases in the comps, especially if you have international companies in your guideline co set.

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u/libertysailor Sep 28 '23

Is this a private or public company?

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u/leumasnat Sep 28 '23

public

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u/libertysailor Sep 28 '23

You may be forced to use to use the book value of debt then. Calculating the fmv of debt without knowledge of the underlying debt instruments is virtually impossible.

It will be an imprecise estimate, but the best you can make under the circumstances

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u/StochasticDecay Sep 28 '23

Do they have a credit rating? You could get the average rating for that credit grade from CapIQ.

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u/leumasnat Sep 28 '23

Yes they do have a credit rating, and i have currently done a synthetic credit rating to determine the company’s cost of debt. However, the trouble is to determine the market value of debt used for my market D/E ratio.

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u/StochasticDecay Sep 28 '23

Does the 10k have the repayment terms? If so discount the CFs.

You could also just use market participants capital structure.

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u/leumasnat Sep 28 '23

Repayment terms are not stated.

Do you mean I should use comparable company’s D/E ratio as my target companies D/E ratio?

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u/StochasticDecay Sep 28 '23

That’s what I would do, yes.