I'm building a levered DCF for a greenfield project where there is 30% equity 70% debt.
Let's say construction capex in Y1 and Y2 is 100 respectively then 30 is via equity.
When calculating returns and IRR should I be using Levered Free Cash Flow (Cash flow to equity) which varies from the actual equity investment? or link to the actual equity cash flow. In the example below, FCFE is 0 when in reality equity has funded 60 over the two years.
The answer is yes. Your calculation of FCFE is just incorrect. You should be subtracting capex and adding debt draws, so your equity cash flows in those years should be -$30 assuming no other CFs for sake of simplicity.
Thanks - is that not what I have done? Debt funding is +70 and capex is - 100 which equals -30. But I am including equity funding in my formula too. Is that where I am going wrong? Thanks again
Correct, you shouldn’t be adding your equity funding in the build-up. Negative FCFE implies equity funding/injections. FCFE is used to calculate returns to the sponsor and conveys cash flow distributed to the equity sponsor if positive or contributed by the sponsor if negative. You can’t contribute money to yourself and call that positive cash flow if that makes sense.
That makes perfect sense and thanks for explaining. So the FCFE should always reflect the equity contributions/inflows in the given period. Appreciate it.
UPDATE: if I had interested expense in the example above, FCFE would be even lower than -30. Would that also be correct?
Yes correct. Though, typically, interest during construction is not a cash expense but gets added to the construction debt balance (capitalized) and is ultimately repaid with a permanent form of financing (eg term loan) at end of construction when the project becomes operational.
Voluptas at adipisci quia. Aut quas alias molestiae eum animi eius omnis unde. Cum voluptatem perspiciatis magni a modi.
Consequatur sequi quis aut natus et animi voluptates. Quos culpa accusantium nihil similique vero nihil. Quod expedita quis unde occaecati debitis commodi unde. Harum ullam rerum provident praesentium assumenda. Ex similique ullam dolorum sint incidunt.
Exercitationem quas modi dolore id accusamus tempora eos. Quo ut qui cum eaque neque aperiam hic laboriosam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...