Answer 12

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Read more on "What is debt?"

See industry averages for debt ratios

The debt in the cost of capital is the debt used to fund the operations and investments of the firm. Using this rationale, it should include all interest bearing debt, short term as well as long term. Non-interest bearing liabilities such as accounts payable, supplier credit and accrued items should be incorporated into working capital and should not be counted as debt.

To the extent that firms fund their operations with off-balance sheet debt, you should try to incorporate these borrowings as well into debt. While this may be difficult to do when firms are deceitful, you can, at the minimum, bring the present value of operating lease commitments into your debt.

One final comment, Analysts are often tempted to include more items in debt, assuming that this is the conservative thing to do. In reality, defining debt much more broadly will increase the debt ratio and reduce the cost of capital. This, in turn, will increase value and not decrease it.


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