Finance leases and implications on CF and DCF... I don't get that
Hey guys,
there is something I don't get with finance leases.
In the income statement, the lease payment is classified as depreciation and the interest payment as an interest expense. So far so good. In the CF statement, as far as I unterstand, we add back the depreciation in the operationg CF, and add it in the financing CF. However, what do we do in a FCF (unlevered) calculation? Do we add back the lease payment which was classified as a depreciation in the income statement? If so, then we would have a higher FCF and thus a higher DCF in comparison to an operating lease. Am I right? Actually, in comparison to an operating lease, our WACC would increase as the debt ratio increases, but let's leave this fact out for a moment.
Am I right with the concept or is there a mistake in my thoughts? But lease payments are certainly recurring operating expences in my understanding and thus need to be added in the FCF calculation. That's why I'm struggering to understand this.
Hope you guys can help me with that. Thanks in advance!
Treat it like it is a debt instrument and proceed as usual. The only caveat is if the interest payments are an ongoing regular business expense, then you treat it as an operating lease and include it before FCF.
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