What do you do with the principle part of an amortizing bond when calculating levered free cash flow?
You have an amortizing bond. The principle part of the amortization payments is not interest, but at the same time this is a required cash payment and thus not available to equity holders.
My textbook says "If there are mandatory repayments of debt, then some analysts utilize levered free cash flow which is the same formula as unlevered free cash flow, but less interest and mandatory principal repayments." However it then gives the formula Unlevered Free Cash Flow + Net Borrowing - Interest x (1 - tax rate). Does this mean if I took out a 50mm loan that levered FCF would increase by $50mm?
Levered Cash Flow Formula and Debt Paydowns
While unlevered free cash flow looks at the funds that are available to all investors, levered free cash flow looks for the cash flow that is available to just equity investors. It is also thought of as cash flow after a firm has met its financial obligations. This includes paying off all mandatory debt payments which would include amortizing bonds or maturity payments.
Levered free cash flow is calculated as Net Income (which already captures interest expense) + Depreciation + Amortization - change in net working capital - capital expenditures - mandatory debt payments.
It is important to note that even if a company is profitable from a net income perspective and positive from an unlevered free cash flow perspective, the company could still have negative levered free cash flow. This could mean that this is a dangerous equity investment since equity holders get paid last in the event of bankruptcy.
Learn more about how to calculate unlevered and levered free cash flow on a detailed thread on WSO.
Read More About Levered Cash Flow on WSO
- Levered vs. Unlevered Free Cash Flow Difference
- Here's a Quick Way to Value Unlevered & Levered Cash Flows
- DCF Analysis: Why do we use an unlevered Free Cash Flow to Firm, but discount it with the WACC (Levered)?
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