DCF for debt-reliant companies
Hi all, I'm an undergrad currently trying to build out a DCF (three-statement) model for a debt-reliant company -- solar panel farm manufacturer. I believe that the company will need to issue future debt in order to finance new projects, and was wondering how this will affect my DCF.
I understand that you usually factor down debt (re-payment) over time, but doesn't it make sense to predict future issuances? In addition, an increase rate hike is sure to significantly affect my company, but I am not sure how to model this in. In general, I am confused as to how to handle the debt sheets of a DCF, and any guidance would be appreciated.
Thanks!
Depends on if you're calculating unlevered or levered cash flows. If unlevered, then your WACC will factor in your cost of debt and when you go from ev to market cap you can adjust accordingly by the debt level. If levered, then you factor in interest payments and only discount by the cost of equity. A DCF is primarily used for companies with STABLE capital structures for this reason. My suggestion would be to calculate levered cash flows with your interest payment assumption and use the current capital structure in your Cost of Equity calculation.
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