When conducting a DCF, the presence of debt primarily affects which financial metric?

In a Discounted Cash Flow (DCF) analysis, the presence of debt has a significant impact on Weighted Average Cost of Capital (WACC) calculations. WACC represents the average rate of return a company is expected to pay to its security holders to finance its assets, and it incorporates the costs of equity and debt, weighted according to their proportional use in the firm's capital structure.

When a company has debt, it can actually lower the overall cost of capital due to the tax deductibility of interest payments. This means that the cost of debt is usually lower than the cost of equity, particularly if the company has a stable cash flow and a good credit rating. As a result, the more debt a company carries, the more it may influence the WACC, thus affecting the discount rate applied to future cash flows in the DCF model.

While future cash flow estimates, cost of equity, and growth rate assumptions are also important metrics in a DCF analysis, they are either less directly influenced by the presence of debt or are not primarily affected. The cost of equity can be influenced by market factors and company-specific risks rather than the capital structure, while growth rate assumptions often stem from operational and business performance rather than financing decisions. Hence, the interplay of