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

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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.

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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.

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Step 2: Create debt variables for each instrument

1

Create a Liability variable

• Create a Liability variable in the appropriate branch (usually the top level entity that legally owns the debt).

2

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.

3

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.

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Step 3: Add equity injections and distributions

1

Model equity injections

For each equity event:

• Create an Equity variable for capital injections.

• Set the amount and timing.

2

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.

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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.

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Step 5: Monitor leverage and coverage metrics

1

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.

2

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.

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Step 6: Link capital structure to valuation

1

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.

2

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.

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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.

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Troubleshooting

Debt appears to be repaid too quickly or too slowly

Recheck amortisation settings and any bullet repayments.

Cash falls negative without explanation

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

WACC does not reflect the new structure

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

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Related guides

• Farm-Level Working Capital Planning

• Working Capital

• Non Current Liabilities

• Using Drivers in Formulas