I think I am overthinking this, but for a company, how do you model the growth and valuation given current capital structure, with only debt capital, and with only equity capital?
Would the model be a DCF? Also, how do each of the three models differ in terms of line items? Would they all just differ in the "enterprise value" part of the model?
Thanks!
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Well your biggest problem is thinking that EV would be affected by choice of capital structure
look up the adjusted present value method
The only lever you're pulling in this situation is the weighting in your WACC. You wouldn't even need 3 models, just show a sensitivity that ranges from 0-100% debt or equity.
You do probably want to have a tiered cost of debt though for once you get to higher debt level. Just build something so your cost of debt ratchets up as it gets closer to 100%
Why would you need to know this? Sounds like a hypothetical.
And trader_timmy what about interest, dividends, etc?
I can't tell if you're being condescending or just asking, but valuation is always hypothetical. These are the kind of sensitivities that bankers are always looking at, so it's worth asking about.
In this case he'd be using a dcf to value the entire firm, so he wouldn't have to worry about interest or dividends.
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