1. Weighted Average Cost of Capital

WACC is the average return all your capital providers need based on how much money they each have in the business. If lenders have put in 400 and want 5%, they expect 20. If shareholders have put in 600 and want 10%, they expect 60. Together they require 80 on 1,000 of total capital. That 80-on-1,000 (8%) is the WACC: if the business consistently earns 8% on the 1,000 (in cash flows before interest), both sides are getting exactly what they signed up for and today’s prices make sense; if it earns more, the total value should move up, if it earns less, the value should move down. 

2. Financing Mix

Start with stress capacity. Model a realistic downturn—revenue down 25%, margins compressed, rates elevated. Calculate maximum debt service that survives without breaching covenants or losing rating access. That’s the ceiling. Target sits below it, leaving room for volatility, working-capital swings, and refinancing.

Leverage adds value until it doesn’t. Replacing equity with cheaper debt lowers cost of capital early. Past a point, spreads widen, refinancing risk rises, equity multiples compress. Optimal leverage is where additional debt stops increasing enterprise value.

Tolerable leverage depends on stability and asset quality. Utilities sustain three to five times net debt to EBITDA—cash flows are regulated. Real estate holds thirty to fifty percent loan-to-value—assets are collateralized. Industrials and healthcare stay near two times for through-cycle resilience. Commodities limit to one times to survive price swings. Tech stays near net cash for flexibility. Financials are constrained by capital ratios, not EBITDA.

Equity absorbs losses. Revolver covers liquidity and refinancing gaps. Core debt is laddered by maturity to spread roll risk. Secured lines only when collateral is real and liquid. Convertibles trade volatility for coupon savings. Subordinated capital used sparingly when speed or flexibility justify cost. Public issuers use unsecured bonds; private firms use bank or private credit loans.