Question

Hi Guys, I am having a hard time on D/E ratio for Equity Beta calculation: shouldn't I take into account payables or non-interest liabilites on the numerator? I understand that for WACC reasons I should not because the ratio will determine the amount of tax shield (hence interest dependent); however, for equity beta I see those liabilites as an obstacle (to be satisfied first) for cash flow to equityholders. Am I correct? tks

Answer 1

No, you aren't correct. You account for short term liabilities in working capital. They aren't interest bearing so they shouldn't be in your D/E ratio.

Answer 2

tks. so, one more question. how should calculate my D/E ratio. debt would be the interest bearing liabilities and equity all the rest? Or equity would be only the equity itself?

Answer 3

Really you could use market value or book value for your equity calculation, but market valuewould be the more appropriate value to use in order to get the most accurate current value for your equity.

Answer 4

Since it is too difficult to get market value of debt, especially on companies that didnt issue,you may get away using book value of debt.When it comes to netting out short term liabilites from your calculations,I would advise you not do it, since WACC is a forward looking estimate and it is a long stretch assuming that you will always have non interest bearing debt.The same rationale would be appliable to interest rates lower than the market's equivalent for a similar company.