WACC within a DCF analysis

CFA Level II Equities
#1

Hey there - was hoping someone could lend a hand.

It has been some time since I built a DCF model. After looking at the template that I originally learned from, which assumes that the fictitious company pays down a decent chunk of debt each year in the analysis, I am struggling to understand how come the NPV calc for both the first 5 yr stage of the model and the terminal value all use the same WACC?

Shouldn’t we be using a different WACC each year? Is it solely because too many assumptions are needed in order to do this? Or is it b/c we are working towards the target capital structure?

Capital structure is changing…how come the WACC isn’t?

Any and all help would be much appreciated! Please and thanks

#2

The FCFF DCF usually assumes an optimal capital structure which would not necessarily change over time even though debt may be paid down or increased.

#3

Very true - So the fact that we are not changing the WACC as we pay down the debt is b/c we are moving towards the optimal capital structure?

I was also thinking that technically we would also have to forecast Beta in order to properly account for the changes to the cost of equity.

Thanks for your help!