Hybrid Capital and WACC: Why Accurate Classification Matters for Valuation.
- DAISAKU KADOMAE
- Aug 10
- 1 min read
Key Points:
Hybrid capital instruments (perpetual bonds, preferred shares, convertibles) contain both debt-like and equity-like characteristics.
Treating hybrids as 100% debt can understate the WACC, leading to overvaluation of the enterprise.
Under IAS 32, certain hybrids must be split into debt and equity components for accounting purposes.
Applying the same split in valuation improves accuracy by reflecting the true cost of capital.
Correct classification of hybrids is critical in markets where such instruments form a significant share of funding.
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