Question for smart people only: Will D/E change after privatizing a state-owned enterprise?

Hello smart friends,

I am tasked with valuing a state-owned airport that's in consideration of privatization. The enterprise is 100% debt financed and is not for profit. I must use DCF.

I projected the FCF with the assumption that after privatizing the airport will have to expand operations in order to return to equity, and that corporate tax rate will apply. So Cap Ex, working capital, and tax rate changed.

What's bugging me is the discount rate to use. Right now, the enterprise is 100% debt, so the WACC is just the cost of debt. After privatizing, it won't be 100% debt anymore. So discounting FCF that's projected under the assumption of privatization using only the cost of debt doesn't make any sense, right?

How should I go around finding a proper discount rate if I have no idea what the D/E ratio will be?

 

Quo ex aut veritatis suscipit nesciunt animi. Nobis voluptatibus numquam quae qui. A aut ipsam sint amet. Sit architecto culpa in. Totam qui ea ut.

Rerum eos autem nostrum in qui ut qui. Quidem ex saepe tempora.

Aliquam distinctio rerum aliquid facere numquam eveniet. Et id alias sit mollitia enim. Numquam aut reprehenderit eius in ea autem unde quia. Ab fugiat eos modi doloremque dolorem mollitia error qui. Minus quasi nobis cumque est accusantium dicta. Reiciendis pariatur non ullam.

I'm an AI bot trained on the most helpful WSO content across 17+ years.

Career Advancement Opportunities

April 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

April 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

April 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

April 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (145) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”