> For the complete documentation index, see [llms.txt](https://help.modelreef.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://help.modelreef.io/how-tos/investment-and-transactions/build-a-capital-structure-model.md).

# Build a Capital Structure Model

This guide explains how to create a capital structure model in Model Reef that includes multiple debt instruments and equity layers, and then analyse how they affect cashflows and valuation.

## Before you start

You should have:

* A working operating forecast for the business.
* Basic familiarity with how Loans, Equity and Dividends are modelled as variables.
* A view of the potential financing instruments you want to include.

If your core model is not ready, follow:

* **Build a Full Financial Model from Scratch**
* **Build a Cash Waterfall Model**

***

## What you will build

* Separate variables for each financing instrument:
  * Senior loans.
  * Subordinated loans.
  * Revolvers or working capital facilities.
  * Equity injections and dividends.
* A combined capital structure view in the Cash Waterfall and valuation.
* Debt service and leverage metrics observed through reports and charts.

***

## Step 1: Map the target capital structure

List the instruments you expect to have, for example:

* Existing bank loan.
* New term loan.
* Subordinated shareholder loan.
* Equity capital from owners or investors.

Decide:

* Who holds each instrument.
* Basic terms: principal, interest, tenor, amortisation pattern.

This map drives which variables you will create.

***

## Step 2: Create debt variables for each instrument

{% stepper %}
{% step %}

### Create a Liability variable

* Create a Liability variable in the appropriate branch (usually the top level entity that legally owns the debt).
  {% endstep %}

{% step %}

### Set key parameters

* Principal amount.
* Interest rate (fixed or linked to a driver such as a base rate).
* Interest payment frequency.
* Drawdown date and structure.
* Amortisation:
  * Level principal.
  * Interest only with bullet repayment.
  * Custom schedule using a driver or manual pattern.
    {% endstep %}

{% step %}

### Confirm in the preview

* Interest flows each period.
* Principal reduces or remains outstanding according to expectations.

Repeat for each loan type until your full capital stack is represented.
{% endstep %}
{% endstepper %}

***

## Step 3: Add equity injections and distributions

{% stepper %}
{% step %}

### Model equity injections

For each equity event:

* Create an Equity variable for capital injections.
* Set the amount and timing.
  {% endstep %}

{% step %}

### Model distributions

* Create Dividend variables to represent cash returned to shareholders.
* Choose periods and amounts consistent with your capital structure plan.

These flows will appear in Financing Cashflow and in the Cash Waterfall under Equity and Dividends.
{% endstep %}
{% endstepper %}

***

## Step 4: Review capital structure impact in the Cash Waterfall

Open the **Cash Waterfall** and examine:

* EBITDA and Change in Net Working Capital.
* Capex and tax.
* Interest Paid for each instrument.
* Debt Drawdowns and Repayments by instrument.
* Equity injections.
* Dividends.

Ensure:

* Debt service is affordable in the context of FCFF.
* Net cashflows are consistent with the desired leverage profile.

If the structure appears too aggressive (for example persistent negative cash), adjust leverage, timing or operational assumptions.

***

## Step 5: Monitor leverage and coverage metrics

{% stepper %}
{% step %}

### Common metrics to track

* Net debt = total debt minus cash.
* Leverage ratio = net debt divided by EBITDA.
* Interest coverage = EBITDA divided by interest expense.
* Debt service coverage = cash available for debt service divided by debt service.
  {% endstep %}

{% step %}

### Build charts and dashboards

1. Create custom chart series using formulas that reference:
   * Debt variables.
   * Cash balance from the Balance Sheet.
   * EBITDA from P\&L or Cash Waterfall.
2. Add these charts to a Capital Structure dashboard.

This gives a clear visual of whether the structure remains within target ranges.
{% endstep %}
{% endstepper %}

***

## Step 6: Link capital structure to valuation

{% stepper %}
{% step %}

### Update WACC and valuation inputs

* Ensure WACC reflects the target capital structure.
* Expose valuation metrics such as Project NPV and IRR, and Equity NPV and IRR.
  {% endstep %}

{% step %}

### Test alternative structures

Use alternative models to test different structures, for example:

* `Model - Capital Structure - Low Leverage`.
* `Model - Capital Structure - High Leverage`.

Compare how valuation metrics change as you increase or reduce leverage.
{% endstep %}
{% endstepper %}

***

## Check your work

* Every debt instrument is represented by its own Liability variable.
* Equity injections and dividends are correctly modelled as Equity and Dividend variables.
* Cash balances remain reasonable and do not drift negative without an explicit overdraft or facility.
* Leverage and coverage metrics are in line with policy or lender expectations.
* Valuation metrics respond logically to changes in leverage.

***

## Troubleshooting

<details>

<summary>Debt appears to be repaid too quickly or too slowly</summary>

Recheck amortisation settings and any bullet repayments.

</details>

<details>

<summary>Cash falls negative without explanation</summary>

Confirm you have not omitted equity injections or necessary funding facilities. Consider modelling a revolver or adjusting capex and growth.

</details>

<details>

<summary>WACC does not reflect the new structure</summary>

Update WACC inputs to align with the target capital stack so FCFF and FCFE valuations are consistent with the actual level of leverage.

</details>

***

## Related guides

* [Farm-Level Working Capital Planning](/use-cases/agriculture-and-primary-production/farm-level-working-capital-planning.md)
* [Working Capital](/help/financial-outputs-and-valuation/working-capital.md)
* [Non Current Liabilities](/help/financial-outputs-and-valuation/non-current-liabilities.md)
* [Using Drivers in Formulas](/syntax/drivers-syntax/using-drivers-in-formulas.md)