DCF Technical Question
Quick question. If the formula for LFCF = CFO - Capex - Debt Principal payment, why do you not account for principal repayment in a DCF? The typical guide says that you only go down to CFO in a DCF, but doesn't the LFCF also subtract out debt principal payment?
Sounds like you are confusing the uses of unlevered free cash flow (FCFF) and levered free cash flow (FCFE).
The reason you don't generally use FCFE is because the model needs to be consistent / apples to apples. That means if you are discounting with WACC (99% of the time), you use FCFF and if you are discounting with CoE you would use FCFE. A DCF is fundamentally valuing the cash flows to the firm, which is independent of the cap stack, therefore interest and debt repayments are not factored in.
But aren't UFCF based off of LFCF? In my mind I see UFCF as (CFO - Capex - Debt Principal Payment) + (Tax adjusted interest expense - tax adjusted interest income)
Debt principal payments would affect UFCF in this scenario right?
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