QoD #1: Capital structure weights in the WACC - Gross debt or net debt?

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DCF-WACC Valuation requires a target capital structure assumption serving as the weights of the cost of equity and debt. This video discusses the question whether the weights should be determined based on gross debt or on net debt (i.e. debt minus excess cash)..
  1. bernhard schwetzler
  2. wacc
  3. capital structure
  4. weights
  5. net debt
  6. relevant weights
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Nice!

Dear professor,
in real life we often model companies in which the actual cost of debt (and also kd) are quite different from the perceived interest on invested cash.
How would you recommend to take that into account in the model (except by the cash added in the equity bridge) ?

Thanks!

italob
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Bumped into your video while trying to find an answer to this. How about if the net debt is negative (more cash than gross debt) do we then use negative weight or assume the net debt to be zero in this case so 100% of the weight is on the equity side only? Additional regarding the cost of debt calculation itself which is generally the tax adjusted interest expense / debt is the debt here also the net debt or gross debt and if net debt can this be negative or not?

jeanm
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What if the cash doesn't earn what the debt costs? It seems that, in this case, using the net debt in the calculation of the WACC would be less accurate, reducing the impact of the tax shield (unless you adjust your cost of debt)

marckitten
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Great video. But what if the firm also has other non-operating assets, such as equity investments or unused land. As I understand these are also not part of EV so should they also be subtracted to get to net debt?
Thanks!

JonesDawg