DCF computation
Hi, Could you please indicate what is the result for the 2 WACC valuations below :
uing gross debt in WACC weights & beta => DCF/FCFF leads to Enterprise value ? => Ent.V - net debt = EV using net debt in WACC weights & beta => DCF/FCFF leads to Firm value ? => FV - gross debt = EV
My reasoning : - gross debt = not taking into account financial profits from cash => operational assets valuation => Ent.V - net debt = taking into account financial profits from cash => operational + non-operational assets => FV Is that correct ? Thanks
Just adding the answer : If using gross weight in WACC, then result of valuation is FV and gross debt is to be substracted. If using net debt weight, result is Enterprise value and net debt is to be substracted to get EV. In brief, the same debt is to be substracted to get EV. This can be explained as follow : gross debt weight = higher debt weight in WACC computation and debt is less costful than equity, hence lower WACC and higher valuation which is FV (FV > Enterprise Value). While with net debt, lower debt weight hence higher equity weight (more costful), hence higher WACC and lower value (which is Enterprise value, as Enterprise value FV). When using gross debt, by coherence, don't use financial products from cash as we exclude cash in valuation (it leads to FV).
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