Financial practitioners usually include short-term debt in WACC calculations if
I.short-term debt is at least 10% of total liabilities;
II.short-term debt is at least 10% of the total assets;
III.net working capital is negative;
IV.net working capital is positive
A)I and IV only
B)I and III only
C)II and IV only
D)II and III only

Question

Quizplus · Accepted Answer

Short-term debt should be included in WACC calculations if it is significant enough to impact the firm's overall cost of capital. Option I is not entirely accurate because the 10% threshold is arbitrary and the impact of short-term debt on WACC depends on the overall size of the firm and its capital structure. Option II is not relevant since the total assets are not used to calculate WACC. Option III is correct since a negative net working capital indicates that a firm may have difficulty meeting its short-term obligations, which suggests that short-term debt is a significant part of its financing mix. Option IV is not sufficient since positive net working capital does not provide any information about the firm's short-term debt.

Financial Practitioners Usually Include Short-Term Debt in WACC Calculations If