Valuation · Intrinsic Valuation
Effect of Debt on a DCF
What happens to a DCF valuation when a company takes on more debt?
Interview question
- Difficulty
- Medium
- Topic
- Valuation
- Subtopic
- Intrinsic Valuation
What this question trains
This problem tests whether you understand the difference between business value and financing choices in a DCF, especially the idea that an unlevered valuation focuses on operations rather than capital structure. It also checks your grasp of how changes in debt can affect the discount rate through WACC, including the tradeoff between cheaper financing and higher default risk. Interviewers ask this because they want to see whether you can connect leverage, cost of capital, and valuation in a clear and disciplined way.