Plausibility of WACC - VC COE Yet Big Debt Component
ERCers. Have any of you ever prepared a traditional WACC analysis, applied in a 5-year DCF, where the required return on equity component was based on early stage VC rate of return as per the AICPA cheap stock practice aid (~55%), and then still included a meaningful debt component in the WACC? Or alternatively, could this make sense to you in certain fact patters? The certain fact pattern in the instant case is that the subject company does indeed have a significant amount of "interest-bearing debt" but the lender is also the majority shareholder, and thus the debt is not arm's length. And the value of the debt is almost certainly below its face value. The subject interest is a controlling interest (arguably so), in a privately held company that has never turned a profit and generated significant losses since its inception over 5 years ago. The forecast at first blush is quite aggressive, so the VC rate of return for the equity makes sense to me, but the debt component of the WACC is completely neutering the equity rate of return as the opposing expert is assuming a capital structure in the WACC that is overwhelmingly debt. The opposing expert is saying the % of debt in the capital structure was determined "iteratively" but does not specify the goal post for what he/she was iterating towards but I suspect it is anchoring on the cap structure of an outlier GPC that is well below investment grade. Any insight on something I have never seen in my 20+ years in valuation would be appreciated. John John Schumacher, CFA Email: jcs@tfpov.com<mailto:jcs@tfpov.com> | Direct: 312.933.2148 True Financial POV, LLC
Just my two cents: male cow manure. Most early-stage companies do not qualify for external debt funding and when they do, it is usually supplemented by a large swath of warrants (and those companies are usually later-stage start-ups). The forecast should be based on equity cash flows and then discounted at 55%, but even then, the practice aid cautions against relying solely on a DCF for a company that has never turned a profit. Is the debt convertible? That could alter the assessment as well. Happy to share more as needed. Neil J. Beaton Managing Director Alvarez & Marsal Valuation Services Cell: 206-963-5401 Direct: 206-664-8934 – Seattle Direct: 415-490-2259 – Bay Area Email: nbeaton@alvarezandmarsal.com From: John Schumacher via Listserv <listserv@ercllc.net> Sent: Thursday, October 1, 2026 5:44 PM To: ERC Serve <listserv@ercllc.net> Subject: [Listserv] Plausibility of WACC - VC COE Yet Big Debt Component ⚠ [EXTERNAL EMAIL]: Use Caution ERCers. Have any of you ever prepared a traditional WACC analysis, applied in a 5-year DCF, where the required return on equity component was based on early stage VC rate of return as per the AICPA cheap stock practice aid (~55%), and then still included a meaningful debt component in the WACC? Or alternatively, could this make sense to you in certain fact patters? The certain fact pattern in the instant case is that the subject company does indeed have a significant amount of “interest-bearing debt” but the lender is also the majority shareholder, and thus the debt is not arm’s length. And the value of the debt is almost certainly below its face value. The subject interest is a controlling interest (arguably so), in a privately held company that has never turned a profit and generated significant losses since its inception over 5 years ago. The forecast at first blush is quite aggressive, so the VC rate of return for the equity makes sense to me, but the debt component of the WACC is completely neutering the equity rate of return as the opposing expert is assuming a capital structure in the WACC that is overwhelmingly debt. The opposing expert is saying the % of debt in the capital structure was determined “iteratively” but does not specify the goal post for what he/she was iterating towards but I suspect it is anchoring on the cap structure of an outlier GPC that is well below investment grade. Any insight on something I have never seen in my 20+ years in valuation would be appreciated. John John Schumacher, CFA Email: jcs@tfpov.com<mailto:jcs@tfpov.com> | Direct: 312.933.2148 True Financial POV, LLC
Neil, thank you for quick response and the additional insights from the Cheap stock practice aid. I don’t think the debt is convertible, but I have not received the agreement just yet. John John Schumacher, CFA Email: jcs@tfpov.com<mailto:jcs@tfpov.com> | Direct: 312.933.2148 True Financial POV, LLC From: Beaton, Neil <nbeaton@alvarezandmarsal.com> Sent: Thursday, October 1, 2026 10:51 AM To: John Schumacher <JCS@tfpov.com>; ERC Serve <listserv@ercllc.net> Subject: RE: Plausibility of WACC - VC COE Yet Big Debt Component Just my two cents: male cow manure. Most early-stage companies do not qualify for external debt funding and when they do, it is usually supplemented by a large swath of warrants (and those companies are usually later-stage start-ups). The forecast should be based on equity cash flows and then discounted at 55%, but even then, the practice aid cautions against relying solely on a DCF for a company that has never turned a profit. Is the debt convertible? That could alter the assessment as well. Happy to share more as needed. Neil J. Beaton Managing Director Alvarez & Marsal Valuation Services Cell: 206-963-5401 Direct: 206-664-8934 – Seattle Direct: 415-490-2259 – Bay Area Email: nbeaton@alvarezandmarsal.com<mailto:nbeaton@alvarezandmarsal.com> From: John Schumacher via Listserv <listserv@ercllc.net<mailto:listserv@ercllc.net>> Sent: Thursday, October 1, 2026 5:44 PM To: ERC Serve <listserv@ercllc.net<mailto:listserv@ercllc.net>> Subject: [Listserv] Plausibility of WACC - VC COE Yet Big Debt Component ⚠ [EXTERNAL EMAIL]: Use Caution ERCers. Have any of you ever prepared a traditional WACC analysis, applied in a 5-year DCF, where the required return on equity component was based on early stage VC rate of return as per the AICPA cheap stock practice aid (~55%), and then still included a meaningful debt component in the WACC? Or alternatively, could this make sense to you in certain fact patters? The certain fact pattern in the instant case is that the subject company does indeed have a significant amount of “interest-bearing debt” but the lender is also the majority shareholder, and thus the debt is not arm’s length. And the value of the debt is almost certainly below its face value. The subject interest is a controlling interest (arguably so), in a privately held company that has never turned a profit and generated significant losses since its inception over 5 years ago. The forecast at first blush is quite aggressive, so the VC rate of return for the equity makes sense to me, but the debt component of the WACC is completely neutering the equity rate of return as the opposing expert is assuming a capital structure in the WACC that is overwhelmingly debt. The opposing expert is saying the % of debt in the capital structure was determined “iteratively” but does not specify the goal post for what he/she was iterating towards but I suspect it is anchoring on the cap structure of an outlier GPC that is well below investment grade. Any insight on something I have never seen in my 20+ years in valuation would be appreciated. John John Schumacher, CFA Email: jcs@tfpov.com<mailto:jcs@tfpov.com> | Direct: 312.933.2148 True Financial POV, LLC
I agree that the typical vc investment will have convertible debt, if any debt exists at all. The warrants will need to be valued and included in the calculation of the effective interest rate of the debt. To use a “market rate” of debt is not proper. That dilutes the WACC. If no convertible debt involved, then stick with the equity rate. [logo-email] R. Christopher Rosenthal, CPA/ABV/CFF, ASA, AEP Managing Member One Annapolis Street, Suite 201 Annapolis, Maryland 21401 Baltimore/Annapolis: 443-482-9500 x104 150 I Street, S.E., Office #104 Washington, DC 20003 DC: 202-652-4500 x104 625 E. Twiggs St., Suite #117 Tampa,<https://www.google.com/maps?q=150+I+Street+SE++Office+#104%20Washington%20DC...> Florida 33602 FL: 813-402-8840 x104 Cell: 410-453-2557 Fax: 443-482-9069 crosenthal@vallitadvisors.com<mailto:crosenthal@vallitadvisors.com> www.vallitadvisors.com<http://www.vallitadvisors.com/> [Image result for small linkedin button for email signature]<https://www.linkedin.com/in/r-christopher-rosenthal-b853821/>[cid:image003.png@01DD51C8.0A3D6E10]<https://www.vallitadvisors.com/site/wp-content/uploads/2019/03/R_-Christopher-Rosenthal-CPA_ABV_CFF_-ASA.vcf> From: Beaton, Neil via Listserv <listserv@ercllc.net> Sent: Thursday, October 1, 2026 11:51 AM To: John Schumacher <JCS@tfpov.com>; ERC Serve <listserv@ercllc.net> Subject: [Listserv] Re: Plausibility of WACC - VC COE Yet Big Debt Component Just my two cents: male cow manure. Most early-stage companies do not qualify for external debt funding and when they do, it is usually supplemented by a large swath of warrants (and those companies a [cid:image004.png@01DD51C8.0A3D6E10] External (listserv@ercllc.net<mailto:listserv@ercllc.net>) [cid:image005.png@01DD51C8.0A3D6E10] Report This Email<removed-link> Just my two cents: male cow manure. Most early-stage companies do not qualify for external debt funding and when they do, it is usually supplemented by a large swath of warrants (and those companies are usually later-stage start-ups). The forecast should be based on equity cash flows and then discounted at 55%, but even then, the practice aid cautions against relying solely on a DCF for a company that has never turned a profit. Is the debt convertible? That could alter the assessment as well. Happy to share more as needed. Neil J. Beaton Managing Director Alvarez & Marsal Valuation Services Cell: 206-963-5401 Direct: 206-664-8934 – Seattle Direct: 415-490-2259 – Bay Area Email: nbeaton@alvarezandmarsal.com<mailto:nbeaton@alvarezandmarsal.com> From: John Schumacher via Listserv <listserv@ercllc.net<mailto:listserv@ercllc.net>> Sent: Thursday, October 1, 2026 5:44 PM To: ERC Serve <listserv@ercllc.net<mailto:listserv@ercllc.net>> Subject: [Listserv] Plausibility of WACC - VC COE Yet Big Debt Component ⚠ [EXTERNAL EMAIL]: Use Caution ERCers. Have any of you ever prepared a traditional WACC analysis, applied in a 5-year DCF, where the required return on equity component was based on early stage VC rate of return as per the AICPA cheap stock practice aid (~55%), and then still included a meaningful debt component in the WACC? Or alternatively, could this make sense to you in certain fact patters? The certain fact pattern in the instant case is that the subject company does indeed have a significant amount of “interest-bearing debt” but the lender is also the majority shareholder, and thus the debt is not arm’s length. And the value of the debt is almost certainly below its face value. The subject interest is a controlling interest (arguably so), in a privately held company that has never turned a profit and generated significant losses since its inception over 5 years ago. The forecast at first blush is quite aggressive, so the VC rate of return for the equity makes sense to me, but the debt component of the WACC is completely neutering the equity rate of return as the opposing expert is assuming a capital structure in the WACC that is overwhelmingly debt. The opposing expert is saying the % of debt in the capital structure was determined “iteratively” but does not specify the goal post for what he/she was iterating towards but I suspect it is anchoring on the cap structure of an outlier GPC that is well below investment grade. Any insight on something I have never seen in my 20+ years in valuation would be appreciated. John John Schumacher, CFA Email: jcs@tfpov.com<mailto:jcs@tfpov.com> | Direct: 312.933.2148 True Financial POV, LLC
Chris, thank you for the response. Neil, Chris, other ERCers, Now that I think further on this valuation, I am thinking my equity value is going to be all option value, otherwise it will be zero. Thus, I am thinking I will apply Black Scholes, to estimate the option value of the equity, with the value of the underlying asset the result from my DCF on an enterprise value level (possibly other methods applied and reconciled), and the strike price the face value of the debt (assuming no warrants). Any reactions on this approach, let me know. In terms of the volatility input to Black Scholes, I think technically it should be asset volatility, not equity volatility, due to my construct of using enterprise value for the value of the underlying asset. Any thoughts on that appreciated as well. Thank you again. John John Schumacher, CFA Email: jcs@tfpov.com<mailto:jcs@tfpov.com> | Direct: 312.933.2148 True Financial POV, LLC From: Chris Rosenthal <crosenthal@vallitadvisors.com> Sent: Thursday, October 1, 2026 4:13 PM To: Beaton, Neil <nbeaton@alvarezandmarsal.com>; John Schumacher <JCS@tfpov.com>; ERC Serve <listserv@ercllc.net> Subject: RE: Plausibility of WACC - VC COE Yet Big Debt Component I agree that the typical vc investment will have convertible debt, if any debt exists at all. The warrants will need to be valued and included in the calculation of the effective interest rate of the debt. To use a “market rate” of debt is not proper. That dilutes the WACC. If no convertible debt involved, then stick with the equity rate. [logo-email] R. Christopher Rosenthal, CPA/ABV/CFF, ASA, AEP Managing Member One Annapolis Street, Suite 201 Annapolis, Maryland 21401 Baltimore/Annapolis: 443-482-9500 x104 150 I Street, S.E., Office #104 Washington, DC 20003 DC: 202-652-4500 x104 625 E. Twiggs St., Suite #117 Tampa,<https://www.google.com/maps?q=150+I+Street+SE++Office+#104%20Washington%20DC...> Florida 33602 FL: 813-402-8840 x104 Cell: 410-453-2557 Fax: 443-482-9069 crosenthal@vallitadvisors.com<mailto:crosenthal@vallitadvisors.com> www.vallitadvisors.com<http://www.vallitadvisors.com/> [Image result for small linkedin button for email signature]<https://www.linkedin.com/in/r-christopher-rosenthal-b853821/>[cid:image003.png@01DD5260.4C2E1750]<https://www.vallitadvisors.com/site/wp-content/uploads/2019/03/R_-Christopher-Rosenthal-CPA_ABV_CFF_-ASA.vcf> From: Beaton, Neil via Listserv <listserv@ercllc.net<mailto:listserv@ercllc.net>> Sent: Thursday, October 1, 2026 11:51 AM To: John Schumacher <JCS@tfpov.com<mailto:JCS@tfpov.com>>; ERC Serve <listserv@ercllc.net<mailto:listserv@ercllc.net>> Subject: [Listserv] Re: Plausibility of WACC - VC COE Yet Big Debt Component Just my two cents: male cow manure. Most early-stage companies do not qualify for external debt funding and when they do, it is usually supplemented by a large swath of warrants (and those companies are usually later-stage start-ups). The forecast should be based on equity cash flows and then discounted at 55%, but even then, the practice aid cautions against relying solely on a DCF for a company that has never turned a profit. Is the debt convertible? That could alter the assessment as well. Happy to share more as needed. Neil J. Beaton Managing Director Alvarez & Marsal Valuation Services Cell: 206-963-5401 Direct: 206-664-8934 – Seattle Direct: 415-490-2259 – Bay Area Email: nbeaton@alvarezandmarsal.com<mailto:nbeaton@alvarezandmarsal.com> From: John Schumacher via Listserv <listserv@ercllc.net<mailto:listserv@ercllc.net>> Sent: Thursday, October 1, 2026 5:44 PM To: ERC Serve <listserv@ercllc.net<mailto:listserv@ercllc.net>> Subject: [Listserv] Plausibility of WACC - VC COE Yet Big Debt Component ⚠ [EXTERNAL EMAIL]: Use Caution ERCers. Have any of you ever prepared a traditional WACC analysis, applied in a 5-year DCF, where the required return on equity component was based on early stage VC rate of return as per the AICPA cheap stock practice aid (~55%), and then still included a meaningful debt component in the WACC? Or alternatively, could this make sense to you in certain fact patters? The certain fact pattern in the instant case is that the subject company does indeed have a significant amount of “interest-bearing debt” but the lender is also the majority shareholder, and thus the debt is not arm’s length. And the value of the debt is almost certainly below its face value. The subject interest is a controlling interest (arguably so), in a privately held company that has never turned a profit and generated significant losses since its inception over 5 years ago. The forecast at first blush is quite aggressive, so the VC rate of return for the equity makes sense to me, but the debt component of the WACC is completely neutering the equity rate of return as the opposing expert is assuming a capital structure in the WACC that is overwhelmingly debt. The opposing expert is saying the % of debt in the capital structure was determined “iteratively” but does not specify the goal post for what he/she was iterating towards but I suspect it is anchoring on the cap structure of an outlier GPC that is well below investment grade. Any insight on something I have never seen in my 20+ years in valuation would be appreciated. John John Schumacher, CFA Email: jcs@tfpov.com<mailto:jcs@tfpov.com> | Direct: 312.933.2148 True Financial POV, LLC
participants (3)
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Beaton, Neil -
Chris Rosenthal -
John Schumacher