How does the application of the Discounted Cash Flow (DCF) model differ for a company with no debt compared to a company with a significant amount of debt, and what specific considerations should be taken into account when valuing an unleveraged company using the DCF approach?

Key Differences and Considerations:

Discount Rate:

• No Debt: The discount rate is the cost of equity, calculated using the Capital Asset Pricing Model (CAPM). It doesn't account for debt.

• With Debt: The discount rate is the weighted average cost of capital (WACC), combining the cost of equity and the after-tax cost of debt. Beta (β):

• No Debt: Use unleveraged beta, reflecting the company's market risk without debt.

Can Equity Value be higher than Enterprise Value ?

Yes, the equity value of a company can be higher than its enterprise value. This situation typically occurs when a company has a significant amount of cash and cash equivalents on its balance sheet that exceeds its total debt, preferred shares, and minority interest combined.

To understand why this is possible, it's important to understand the difference between equity value and enterprise value.

Equity value, also known as market capitalization, is the total value of a company's outstanding equity. It represents the value that accrues only to the shareholders of the company. It can be calculated by multiplying the market value per share by the total number of shares outstanding.

On the other hand, enterprise value is a measure of a company's total value, often used as a comprehensive alternative to equity market capitalization that includes debt. It is calculated by…

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