I have to prepare for an interview in the transaction and M&A area of a Big4, and I have been told that they ask technical questions related to company valuation. In particular there is a question I have when calculating the WACC, and more specifically the E and D weights of the WACC formula.
The theory says that:
- E= market value of equity
- D= market value of debt
and then the WACC=ke * E/(D+E) + kd * (1-tax rate) * D/(E+D)
Well, if you ask me about a private company, it is not easy to get the market value, as there may not necessarily be comparable companies or there is no public rating that applies to the company in question. Therefore, what is called "market value" does not exist or is very difficult to obtain, and it is necessary to look for an alternative way to calculate it.
I have read in various sources that there are people who calculate E+D as the total sum of the Assets, which, as it has to be the total sum of the liabilities, then by default we have to calculate
- E=balance sheet value of equity
- D=balance sheet value of short-term liabilities + long-term liabilities.
But there are specialists who say that this is not correct, not even as an approximation.
That said, what would be the answer to questions in a technical interview?
For example, would it be wrong for me to say this?
- E= balance sheet value of equity
- D= balance sheet value of net financial debt, i.e. long-term financial debt + short-term financial debt + credit facilities - cash.
Is that answer correct or are there other criteria for calculating E and D values?
