Equity valuation of capital intensive and highly geared maritime shipping companies

In business practice, the model of discounted free cash flow to all capital providers is commonly used to estimate the intrinsic equity value for most capital-intensive industries, including the maritime shipping industry. In addition to being capital-intensive and highly levered, maritime shipping companies also engage in frequent debt restructuring and refinancing. This study proves mathematically and provides empirical evidence that the model of discounted free cash flows to all capital providers, which relies on the assumption that the fair value of debt is equal to its book value, does not correctly estimate the intrinsic equity value of a maritime shipping company that regularly restructures and refinances its debt capital. The reason lies in the fact that debt modifications lead to alterations of cost of debt. In addition to the academic implications, the insights of this study provide guidance to ship finance practitioners to use the model of discounted free cash flows to equity capital providers for the equity valuation of highly geared shipping companies with frequent debt modifications.