WACC and shor-term debt cost

[zxfmontreal]

Hey,

When calculating WACC, I think short-term debt is not taken into consideration? For example, let’s say a company has $ 200 long-term debt with cost at 3.5%, $100 short-term debt at 2% and equity of $200 at 1.5% and preferred stock of $100 paying $1 dividend and the tax rate is 30%

So the total firm value=200 of long term debt+200 of quity+100 of PFS=500

W_d=0.4, W_e=0.4, W_pfs=0.2

WACC=0.4*0.035*0.7+0.4*0.015+0.01*0.2

So the short-term debt is not taken into consideration at all.

Can someone confirm plz?

Thx!

[suspense]

No one has respond to this

[tteraannccee]

For me it sounds really strange. You have to take into accout all debt of the firm in order to cacucalte WACC because of the definision.

[zxfmontreal]

cuz I did a sample exam and found such a problem…I considered all factors in but the solution says the short-term shouldn’t be considered.

I don’t remeber seeing this in the books so I am here to confirm.

[zxfmontreal]

@edupristine

Capital generally refers to the fund that is used by a firm to fund its long term requirements. According to the definition, capital includes equity (and preferred shares) and long term debt.

Short term loans are used to fund short term requirements. We don’t classify short term loans or liabilities under capital.

Hence, you don’t have to include the short term debt while calculating WACC. Only include cost of equity, cost of preferred stock and cost of long term debt while calculating WACC.

Hope this clarifies the doubt!!!

Thank you so much! Yes it clears my doubt!