The Impact of Hybrid Capital Classification on Valuation
- DAISAKU KADOMAE
- Aug 10
- 1 min read
Key Points:
Naïve approach (100% debt treatment) yields a 7.0% WACC.
Refined approach splits hybrids into debt-leg (4% cost) and equity-leg (18–20% cost), raising WACC to 8.8%.
A 1.8% WACC increase can cut enterprise value by ~25%.
Equity carries the highest cost of capital (10–12%), driven by market risk premium and country risk premium.
Debt has lower cost due to after-tax yield on bonds/loans.
Hybrid equity-legs carry emerging market equity risk plus illiquidity, subordination, and coupon deferral risk.
Comments