Debt policy

A company's debt policy defines its approach to financial leverage: the targeted debt/equity ratio, the preferred types of financing (bank debt, bonds, mezzanine), the acceptable maturity profile and the covenant framework it is willing to accept. It reflects the balance between using financial leverage to enhance equity returns and maintaining sufficient financial flexibility to absorb operational shocks. In business valuation, the debt policy assumptions (target capital structure) determine the WACC: a more leveraged target structure reduces the WACC (up to the point of financial distress risk) and increases the theoretical equity value.

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Example: a Swiss industrial company targets a net debt/EBITDA ratio of 2.0x (CHF 6.0 million net debt against CHF 3.0 million EBITDA) as its debt policy anchor. This 40% debt / 60% equity structure generates a WACC of 8.2% — 0.8% lower than an all-equity structure — increasing the DCF valuation by approximately 10% relative to an unlevered scenario.

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Hectelion analyses debt policy and capital structure assumptions in every WACC construction, documenting the rationale for the target leverage used.