Hi guys, I'm reading 400 Investment Banking Questions these days. Question 32 in the part of DCF- basic says "A company has a high debt load and is paying a significant portion of principal each year. How do you account for this in a DCF?"
And the answer is :
Trick question. You don't account this at all in a DCF, because paying off debt principal shows up in Cash Flow from Financing on the Cash Flow Statement - but we only go down to Cash Flow from Operations and then subtract Capital Expenditure to get free cash flow.
If we are looking at Levered Free Cash Flow, then our interest expense would decline in future years due to the principal being paid off - but we still wouldn't count the principal repayments themselves anywhere.
I can understand why the repayment has nothing to do with Un-levered Free Cash Flow, but why we don't count the principal when looking at Levered Free Cash Flow?
I think the repayments should be subtracted form FCFF to get FCFE.
thanks a lot.