Real Estate WACC Valuation
I am working on a feasibility financial model for a commercial complex. For this purpose I am calculating NPV of the project. The project will be financed by 50% debt 50% equity, however the debt is a fully amortising loan with equal payments over 10 years. The company will have no debt after 10 years. For the purpose of WACC calculation, I need to know what Debt/Equity ratio should I assume. Is it 50% with which the project started, 0% the ending debt/equity or somewhere in between?
R, JS
Calculate D:E ratio and your respective discount rate accordingly for each year.
If your cap structure is changing YoY, you should consider using APV so you don't have to calculate a new WACC every year.
1) Project Cash Flows 2) Discount Cash Flows at Equity Cost of Capital 3) Value tax shields each year separately from Cash Flows. (Value of Tax shields in any given year=book value of debt in any given year*marginal tax rate) 4) Discount your tax shields at equity cost of capital. 5) Find terminal value using Gordon growth for cash flows. If the loan is fully amortizing then there is no terminal value for tax shields since there will be no debt into perpetuity. You could also imply a terminal value by assuming an exit cap of 100-150bps above current market rates (probably the better approach)
Thank you for the responses. Eophigam32, don't understand why or how you are calculating the terminal value at 100-150bps?
All he is saying is that if you have a going in cap of 5%, you should model the exit cap on the terminal year cashflow at 6% or 6.5%. (5% + 100bps or 150bps)
Project Valuation WACC (Originally Posted: 01/25/2016)
I am working on a feasibility financial model for a commercial complex. For this purpose I am calculating NPV of the project. The project will be financed by 50% debt 50% equity, however the debt is a fully amortising loan with equal payments over 10 years. The company will have no debt after 10 years. For the purpose of WACC calculation, I need to know what Debt/Equity ratio should I assume. Is it 50% with which the project started, 0% the ending debt/equity or somewhere in between?
R, JS
these are just my own assumptions but i would use a separate discount rate based on the Debt to equity ratio that the company actualy had during the year it generated a certain cashflow. so NPV = FCF1/(1+R(50%,50%)) + FCF2/(1+R(55,45)^2 + ...
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