Module II· WACC & Capital StructureIntermediate
Question
Should you use the current or the target capital structure in WACC?
Answer
Mechanics
The target capital structure is standard. WACC reflects long-run financing costs — the current structure could deviate temporarily (e.g. after a recent M&A deal). The target is typically derived from: (1) the sector's optimal structure, (2) the median of the comp group, (3) management guidance.
Deep diveShow more details
Example
Current D/E 0.8, sector median 0.5, management plans deleveraging → WACC with 0.5 D/E. For an LBO/sponsor: the post-LBO structure as the target.
Pitch tip
In a DCF pitch always state 'Target capital structure: 30% Debt / 70% Equity, in line with industry peers' — make the reasoning explicit.