How to find the optimal capital structure and WACC for acquisition/buyout valuation of an unlevered and private retail company, that has large amounts of capitalized operating leases (90% of balance sheet total)? Without operating leases, one would determine optimal cap structure and use for WACC to discount FCFF, but how do the capitalized operating leases effect this procedure (and optimal cap structure)?
Cheers,
BD Elliot
That’s quite intense question to ask 3 weeks after the exam.
Sorry, I don’t know the answer. I forgot everything about finance on 15/06/19 @5pm
I would assume the listed comparable companies (GPC) you have would follow IFRS 16 by now, in which basically all leases (few exceptions but don’t think they would apply based off your explanation) must be capitalized on book. Use that data to calculate optimal DE ratio, etc. Then I would take the business plan of the target, set up some assumptions (I.e make cost of debt in WACC the interest rate for the leases) and transfer all the offbook operating leases on book. The way to do this is pretty clearly outlined in CFA 1 and 2 FRA, but you could really check anywhere on the internet and I’m sure you could figure it out.
Yep, either find a public company and adjust or capitalize the lease and adjust the balance sheet, then find optimal WACC. As the new lease requirements are in affect, companies will re report annual reports for capitalizing the operating lease now.