Credit Spread to calculate Cost of Debt
Hey guys, I am doing a valuation on a company with no debt (ST or LT).
Should I just have cost of equity as my WACC? Would it be too aggressive to assume the company will be debt free for the next 5 years (good cash position, no debt past 3 years, build full model+debt schedule and it indicates cash flow from operations is enough to cover for any shortcomings)?
Another method to calculate cost of debt is to use the credit spread, can someone explain to me how I can use it to calculate CoD and how to find spread of the company?
Thanks!
If there is no debt in the capital structure, WACC is simply the cost of equity. In a DCF, you are basing WACC on the company's targeted capital structure, not the current structure. If you assume that the company will remain debt free throughout the projection period, just stick with the cost of equity for WACC.
Is there no debt outstanding or no debt at all? They might not have any debt outstanding but they could still be subscribed to a revolver, where they would have to draw on it if there are any cash flow shortfalls.
No debt at all. Should have revolver, would that be my CoD?
Use the CoE as your WACC.
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