Question

Hi, I am doing a DCF valuation of a company which is 95% leveraged. Can I apply the usual techniques or should I take some discounts ?

Answer 1

Leverage can only make a material difference in valuation if the subject company varies significantly from the industry norm.

Think about this, industrial companies may have higher leverage relative to the other industries. Banks are the most levered because they operate on the basis of borrowing money and lending it out.

I recommend tweeking the required rate of return for your DCF model based on level of deviation from industry specific leverage.

Answer 2

IMO, such highly levered firms are not public listed, more likely a buyout firm that has gone through a LBO. If it's a private company, there should be some discounting to the valuation, and valuation multiples are more preferable than DCF usually. If you would clarify further on the nature and structure of the business and we will be able to help further.