Debt Repayments in a DCF
Could someone explain to me why paying off the minimum debt in using Levered FCF is better than paying off the debt more quickly in a DCF.
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If you spend your excess cash flow to pay off debt, then you're not realizing that cash flow as profits. The point of using that debt is to buy assets for as low a price (in terms of equity) as possible and use the cash flow you get from the asset to pay off the debt just enough that you don't default but can still pocket as much profit annually as you can. Then, when you sell the asset or refinance the asset you take those proceeds to pay off the original debt and either realize total profits of the investment or refi into more attractive debt terms that allows you to keep the asset cash flowing.
If you pay off the debt ASAP, then you might as well have not used debt at all for the purchase of the asset.
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