How should I treat short term debt in a dcf? I know this has been asked, but what changes in this instance is that the company I am valuating only has 50M in short-term debt; no LT debt. I know this isnt included in NWC, but where would I implement this in the model? What im doing is im getting the levered fcf since its only 1 interest expense and using cost of equity for the discount rate. Also, since the company Im valuating is in a growth industry, has been unstable lately, has a beta of 0.4, and only has 1 major competitor (cant use different betas), should I still be using CAPM for CoE? I put the Market return [11%] as my CoE because a 6% discount rate seemed very low.
Dont freak out thinking that I should know this stuff, Im not an analyst or anything and have not taken any finance classes, haha. Im just starting to learn this stuff.
The simple answer is that you use unlevered FCF in a DCF so you just ignore the debt and interest expense. Essentially you are figuring out how much cash the operating business throws off, independent of capital structure, which is taken into account via WACC and also netting off debt from your final value.
would I use that debt in the WACC, even if its supposed to be paid within this year? Thought only LT Debt was supposed to be included in the WACC calculation since youre trying to find the PV of the future cash flows (by that time, the debt will be paid off). That's how I think about it, but if my logic is wrong, would you mind going over how it works? Just trying to fully understand everything as I do it. Thanks
WACC is target or normalized capital structure.
As an aside, debt is rarely ever fully paid off (a healthy company generates higher returns with leverage); rather it is usually just refinanced with new debt.
What mrb says. A little debt will always put the company closer to the "optimal" capital structure since interest payments are tax deductible.
As for your beta, that doesn't sound right. High growth and unstable? High growth compared to the overall market? That beta should be greater than 1. It's likely that there is little to no volume on the stock, which is why there is a low beta.
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