Is Line of Credit treated as LTD?
I am trying to figure out where a company's Line of Credit fits into my DCF model.
I have a DCF model, using a WACC, where I am trying to find the equity value.
The answer I receive after the sum of present values and residual value would be my enterprise value. I now need to deduct Long Term Debt to get to an Equity Value.
As I understand the Long Term Debt should consist of interest bearing debt that must be repaid. To me a Line of Credit will have to be repaid and accrues interest.
Should the Line of Credit be included in LTD in my DCF model, or should it factor into changes in working capital?
Many thanks this topic is confusing to me and I couldn't find a definitive answer.
debt
no. lines of credit (like revolver) are usually current. it also should not affect working capital because it is a financing decision and not an operating one like A/P or accrued wages, for example.
So if a company has $30MM in revolver it's not LTD, and it's not in W/C? It has to be accounted for somewhere. At some point the company has to use cash generated to repay the revolver right?
My bank classifies it as long term simply because most rcs don't have a current maturity and match our other tenors. You have to dig into the firms financials a bit.
Short term debt is what is due within 1 year. Contractual. Bond maturities, amortization, etc. Since a revolver can be outstanding for longer it is LTD. I suppose if there is an annual clean up provision it might be STD.
You think it should be w/c? So then the deduction of the revolver should be planned in changes in W/C?
Doesn't make sense to me when trying to arrive at an equity value. You can't model a payment of $30MM revolver in a DCF on a yearly basis, and thats if your using cash flow to equity which I prefer not to do.
You model revoler usages all the time. You need to if you're building a 3 statement model. It should be pretty easy if you look at historical draws. Worst case scenario just consider it fully drawn.
I think to answer your question, it doesn't matter if it's long-term debt or short-term debt. When calculating equity value, you should take enterprise value and subtract total debt (CPLTD, ST Revolver, LTD). Whether ST or LT is irrelevant.
That being said, changes in revolver are not part of working capital as it is a financing decision not operating (as mrchow noted above). When building out a 3 statement model, draws/pmts on the revolver are not projected, they are the plug number to support the projected changes in W/C (with cash as the asset plug). Am I wrong here?
I could be wrong, but isn't the current liabilities, and the changes associated with them captured in changes in W/C? You would subtract current liabilities from Enterprise Value.
I am going to subtract the total Revolver and subtract it from the Enterprise value. I will also add back in cash.
Changes in W/C will be A/R and Inventory (only other current assets) and Current Liabilities. Does this make sense to you guys?
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