In what situation should short-term debt or notes payable be included as part of the cost...

In what situation should short-term debt or notes payable be included as part of the cost of debt when calculating the WACC?

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Expert Solution

The WACC is the overall cost of raising funds that will fund a long-term capital intensive project like business expansion, acquisitions and mergers, purchase of machinery, etc. The main reason for not considering short-term debt and notes payables under the caculation of WACC is that these short-term sources of funds are used in the working capital management. These does not fund the long-term capital projects.

In what situation should short-term debt be included in cost of debt under WACC?

The short-term debts and the notes payables can be considered in the cost of debt while calculating the weighted average cost (WACC) only if such short-term funds are used in the long-term capital intensive projects. In other words, if the funds obtained from short-term debts are usd in the long-term projects and investments, in such situation we should consider the short-term debt as a part of cost of debt under WACC calculation.

jeff jeffy answered 1 year ago

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