I’m curious about how you would deal with the following sources of capital in a WACC calculation. This is a real-world situation, not a CFA question. The company is a startup with some unique arrangements and a complex capital structure. Any links or resources on these subjects would be greatly appreciated!
Source 1 - The company has three classes of shares: A, B, and C.
- Classes A and B have one vote per share, Class C has no votes.
- Class A and B holders have priority with respect to distributions until their contributions are repaid.
- Class A holders are repaid their initial contributions before Class B holders.
- Class C holders’ distributions are capped at 15% of the cumulative total distributions paid to date.
Question: Let’s say a DCF shows this company’s equity value is $10 million. How do you divide the equity value between the classes of shares?
Source 2 - This same company has an arrangement with a U.S. state government to fund the development of certain technologies. This funding is reported on the balance sheet as short-term and long-term “amounts payable” to the state agency which provided the funding. Repayment of the funding occurs as products which are developed through the funding are sold. Let’s say the agreement calls for 2% of revenue from the sale of these products to be repaid.
Question: Does this funding count as invested capital? Seeing it reported on the balance sheet as “long-term amounts payable to” makes me think that it does. And I would say it behaves a lot more like invested capital than trade debt. But how would you determine the cost of this capital?
Source 3 - Convertible notes payable with a 5% interest rate, interest-only payments made quarterly. The holders may covert to Class A shares on a dollar-for-dollar basis.
Question: How do you calculate the cost of capital for these convertible notes? My understanding from articles like this and this is that you would use some variation of an option pricing model. However, as per Question 1 (above), I don’t know how to value the Class A shares by themselves.
Source 4 - This company has an arrangement with an equipment supplier that 50% of all revenue from products that were manufactured using the equipment are paid to the supplier until the balance is paid off. This is reported on the balance sheet as “Term note payable to supplier.”
Question: This question is the same as number 2 since the arrangement is very similar. I’m even more inclined to think balance qualifies as invested capital because it’s reported as a term note.
Thank you in advance for any advice related to this! I’m not looking for anyone to solve this problem for me, just some guidance on how to approach it. If any of you have encountered similar situations before, I would be very interested to hear about them.