Help with valuation concepts
Hi all,
I am trying to teach myself valuation through a book and online and had a few questions if you would be willing to help...
I am confused about what increases a company's wacc? Is it more equity or more debt? and how would this affect the beta? For example, I thought that if you had more equity your wacc would go up because it is a more expensive form of financing. Also if you do have outliers in your comp set, how do you know which ones to take out ?
When using the gordon growth method to find the terminal value...how come you divide the terminal period cash flows by the WACC-G..I understand the formula, but I don't understand the concept behind doing this calculation
When calculating the FCF...Why do we first subtract out expenses like depreciation and then add them back in after calculating NOPAT?
Thank you for the help!
Debt will initially decrease a companies WACC because it is less expensive however after a certain point WACC will become higher because the company will be a lot riskier if it has more debt (this increases COE and COD). Beta also increases with leverage.
This comes from the formula for a geometric series
We deduct non cash expenses when calculating NOPAT to reflect that the company saves on taxes and add them back because they are non cash expenses and the company does not directly pay for them and dont directly impact FCF
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