Hello. I was working through a problem set a friend had given me and realized that the levered and unlevered DCF provided different values for the share price (once you make the adjustments from Enterprise Value to Equity Value). I assumed that this was due to using a WACC that assumes the capital structure does not change. Is this correct? The inputs are the same across both examples. Thanks.
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Make sure you are using cost of equity, not the WACC when doing the LFCF analysis.
I did. I feel like I did everything right, the prompt says the answers should be different, just curious why. I figured it’s to do with WACC assuming a constant cap structure, but wanted to get more input.
Yes, that is to be expected. Different cash flows (before vs. after debt/interest payments) and different discount rates (WACC vs. cost of equity). Note that the WACC in the ULFCF analysis does take into account the capital structure.
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