Lesson 7 of 7
When one rate breaks
A blended rate assumes a fixed capital structure, one risk, and financing separable from the business. Three cases break it, and 2,424 listings carry none.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A weighted average cost of capital assumes the debt and equity weights stay where they are for the whole forecast.
- Where they will not, the alternative is to value the business unlevered and add the financing effects separately.
- Some companies get no blended rate at all, and the reason is recorded rather than replaced with a plausible number.
A single blended rate is a convenience. It works when the mix of debt and equity is stable, the risk is one risk, and the financing is separable from the operations. Three situations break one of those, and the response to each is different.
Why no blended rate is published, by reason
- No debt line read from the filing · unknown, not debt-free1,954 listings
- A deposit-taking lender311 listings
- Filed interest is not a cost of the debt159 listings
Break one: the capital structure moves
The weights in a blended rate are today's. Discounting ten years of cash flow at it assumes they hold for ten years.
For a company that will pay debt down substantially, that is wrong in a predictable direction: the real rate rises each year as the cheap debt share shrinks, so a constant rate understates the discounting later and overstates the value. The same applies in reverse to a company levering up.
The alternative is to separate the two effects. Value the business as if it had no debt, discounted at the unlevered cost of equity, then add the present value of the tax shield the debt actually produces, year by year on the schedule the company will follow. That is adjusted present value, and its advantage is not precision: it is that the financing assumption becomes a visible line rather than a weight inside a rate.
Break two: one company, two risks
A blended rate applied to a group whose divisions face different risks prices none of them correctly. The capital-intensive division is discounted too cheaply and the asset-light one too dearly, and the total can be right while every part is wrong.
The response is to value the parts at their own rates and add them, which needs segment disclosure good enough to build a cash flow per segment. Where it is not, the honest statement is that the rate is a blend and the valuation is a single number about a group of businesses.
Break three: the financing is the business
For a bank, interest is not the price of capital, it is the price of the raw material. A blended rate built on its borrowings would describe its deposit costs, so no rate is published for one: 311 listings carry that refusal on 2026-09-16.
The same logic removes the enterprise-value multiples for those companies, and the replacement is the equity side throughout: what the equity earns, what it is worth on the books, and what the book is made of.
Two more refusals, and one repair
No debt line read. 1,954 listings. A total with a missing component is unknown, not zero, and a company we did not read borrowings for is not a company without borrowings.
An implausible cost of debt. 159 listings, where filed interest over debt exceeds 20 percent and is therefore not a rate any lender charged.
The weights themselves. Until 2026-09-11 both weights in this product were book values. Book equity is not what a shareholder requires a return on, and for a company that has bought back more stock than it has retained it is negative. The stored rate was below zero for 92 companies and below the risk-free rate for 463, which no cost of capital can be. Equity is now weighted at market value and book equity is used only where no market value exists.
That repair is the general lesson in miniature: a blended rate is a weighted average, and a weight that is not what it claims to be breaks the average silently.
Check yourself
Why does a constant blended rate misprice a company that will pay down debt?
- Because the interest expense falls
- Because the cheap debt share shrinks each year, so the true rate rises while the model holds it fixed
- Because the beta rises with leverage
Show the answer
Answer: B.
The weights in the rate are today's. If they will move in a known direction, holding them fixed biases the answer in a known direction too.What does adjusted present value do differently?
- Uses a higher discount rate for later years
- Values the business unlevered and adds the financing effects as their own line
- Ignores the tax shield entirely
Show the answer
Answer: B.
Separating them makes the financing assumption visible and lets it follow a schedule instead of hiding inside a single weight.A company has no total debt line read from its filing. What should its cost of capital be?
- The cost of equity, since it has no debt
- Absent, with the reason recorded, because a missing component makes the total unknown rather than zero
- The market median
Show the answer
Answer: B.
Several large filers report borrowings this product does not read. Treating that as debt-free would publish a confident and wrong rate.Sources
- The product's own stored refusal reasons for the weighted average cost of capital, read 2026-09-16.
- The product's own measurement on 2026-09-11: 92 companies carried a cost of capital below zero and 463 below the risk-free rate while equity was weighted at book value.
- Modigliani and Miller, 1958: the separation of operating value from financing effects that adjusted present value implements.
What this leaves out
- Adjusted present value is not more accurate. It moves the financing assumption somewhere you can see and argue with it.
- The refusal counts describe listings with an indicator row on one date, and are a statement about what could be computed rather than about the companies.
- Segment-level rates need segment disclosure that many filers do not provide at the level a cash flow needs.
- Nothing here is advice about any security.