Iterative WACC
The convergence problem in cost-of-capital modeling when the target capital structure is itself a model output (e.g., LBO debt paydown schedule). The discount rate depends on capital structure; capital structure depends on projected free cash flow; free cash flow depends on the discount rate. Practitioners resolve this either by (a) using a single fixed long-run target D/E (simplest, defensible for steady-state firms) or (b) building a year-by-year WACC schedule that re-levers beta against the projected D/E in each forecast year (most rigorous; common in LBO models). The cleanest workaround is APV valuation, which sidesteps the WACC circularity by valuing the unlevered firm and tax shields separately.
Lessons that use this term
Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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