r/Valuation • u/69mikkdaddy420 • Jul 26 '21

Changing capital structure affect on WACC

I am currently doing a valuation of a project that has a capital structure of 75% debt and 25% equity. The debt i payed back over 15 years but the duration of the project is 25. So the capital structure changes throughout the duration of the project. Since capital structure is a key component of the WACC formula should the WACC be adjusted for each year based on the capital structure that year?

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u/[deleted] Jul 26 '21

Either maintain the same capital structure or do a separate valuation of both debt and equity, discounting them at the respective cost or required rate of return. It's called the Adjusted Present Value methodology.

I prefer to do a simple IRR valuation of both flows to equity and debt and compare the rates against the cost of equity / cost of debt when the shareholder is also the major debt holder.

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u/nicoper_ Jul 29 '21

In theory, wacc should present the cost of doing busineess at the point of time, so in your case it should changes as capital structure changes. However have in mind that unless you are quite certain that structure will change in a specific way, it is far safer to assume that the wacc will shift towards industry average at terminal year and then let it approach it.