In an Unlevered DCF, how do you handle a company’s debt repayments?

• A. You account for them in Free Cash Flow calculations
• B. You do not account for them at all
• C. You handle them through adjustments to net income
• D. You include them as capital expenditures

Answer: (B)

In an Unlevered Discounted Cash Flow (DCF) analysis, the focus is on the cash flows generated by the business without taking into account any impact from debt financing. This approach assumes that the company is entirely equity-financed, and as a result, it excludes any financial obligations such as debt repayments from the Free Cash Flow calculations.

Unlevered cash flows reflect the operating performance of the business on a standalone basis, uninfluenced by how the company is financed. Therefore, debt repayments do not factor into the calculation of unlevered free cash flows, as they would be relevant in a levered DCF analysis where the cash flows available to equity holders are considered.

By not accounting for debt repayments, you are isolating the operating performance of the company, which can be particularly useful for valuation purposes when comparing companies with different capital structures. This methodology allows analysts and investors to assess the intrinsic value of the business based purely on its operational efficiency and profitability, independent of financing decisions.