I have seen that you should subtract all mandatory net debt repayments to get to levered FCF. What about for "non-mandatory" i.e. discretionary debt repayments, should we subtract those as well?
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will the money used to repay debt be available to shareholders? no. Do you need only money available to shareholders for levered FCF? yes.
I think your answer is pretty clear.
So that means yes, we should also subtract non-mandatory debt payments for levered FCF?
Yes, any cash flows to non-equity holders need to be subtracted.
Well technically that cash is available to shareholders. The business is simply choosing to use those funds for optional debt repayment.
By this logic, two otherwise identical companies would have different valuations based on their optional debt repayment. This seems dumb (even though i agree thats how youd calc levered free cash flow)
Unlevered free cash flows are much better herep
That is not necessarily illogical.
Depending on how you evolve your capital structure using the discretionary debt repayment, you would inherently change the value of your company.
So two companies that pay down debt differently will be worth different due to factors like debt tax shields and future interest payments even if all other sources of cash flows and mandatory debt repayment schedule are identical.
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