If the cost of debt and the cost of equity are the same, the debt capital percentage would not influence the valuation calculations. If a business is therefore financed 100% through debt or the contributors of equity only require a return which is equal to the annual loan interest rate (cost of debt), the debt equity percentage will have no effect on the business valuation. This is however rarely the case as equity contributors usually require a higher return than the loan interest rate due to a higher risk which is associated with equity contributions.

CopyFinancial > If the cost of debt and the cost of equity are the same, the debt capital percentage would not influence the valuation calculations. If a business is therefore financed 100% through debt or the contributors of equity only require a return which is equal to the annual loan interest rate (cost of debt), the debt equity percentage will have no effect on the business valuation. This is however rarely the case as equity contributors usually require a higher return than the loan interest rate due to a higher risk which is associated with equity contributions.