{"id":11179,"date":"2020-07-09T08:30:00","date_gmt":"2020-07-09T12:30:00","guid":{"rendered":"https:\/\/einvestingforbeginners.com\/?p=11179"},"modified":"2022-07-08T14:22:51","modified_gmt":"2022-07-08T18:22:51","slug":"market-vs-book-value-argument","status":"publish","type":"post","link":"https:\/\/einvestingforbeginners.com\/market-vs-book-value-argument\/","title":{"rendered":"Valuation Basics: Market vs Book Value \u2013 and The Argument for Both"},"content":{"rendered":"\n
When performing a DCF valuation, you must <\/strong>make a distinction between using market vs book value<\/strong> for debt. It is a critical part of calculating the weighted average cost of capital (WACC).<\/p>\n\n\n\n The easy way<\/span>, of course, is to just use book value of debt<\/span> from the company\u2019s balance sheet and be done with it. The problem is that this can lead to unbalanced weights for the WACC calculation. It\u2019s a quick shortcut, and seems harmless, particularly when analyzing companies with low leverage.<\/p>\n\n\n\n However, using this lazy approach can be dangerous<\/mark><\/strong> in either understating or overstating the cost of debt in the overall WACC equation. That will ultimately distort the discount rate used in the valuation process.<\/p>\n\n\n