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

Rank: Baboon | 109

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?

Comments (1)

Nov 30,2017

1-Click to Unlock All Comments - 100% FREE

Why do I need to be signed in?
WSO is a knowledge-sharing community that depends on everyone being able to pitch in when they know something.
+ Bonus: 6 Free Financial Modeling Lessons with 1-Click Signup ($199 value)