What is the primary consideration when determining whether to use total or net debt in WACC calculations?

The primary consideration when determining whether to use total or net debt in WACC calculations centers on how accurately it reflects the capital structure percentages of the company. WACC, or Weighted Average Cost of Capital, is a crucial metric used to evaluate the cost of financing a business through both debt and equity.

Total debt includes all interest-bearing liabilities, providing a comprehensive view of a firm's financial obligations. In contrast, net debt subtracts cash and cash equivalents from total debt, giving a more nuanced understanding of the actual financial risk the company faces after accounting for liquid assets.

Using net debt can lead to a more precise calculation of the company's leverage and the overall risk profile, which in turn influences investor perception and the cost of both debt and equity financing. This distinction is vital because a misrepresentation of the capital structure can lead to incorrect assessments of WACC, impacting investment decisions and valuations.

Considering how total or net debt aligns with the company's actual financial position ensures that stakeholders are accurately informed about the risks and costs associated with the capital used in the business.