Does long-term debt enter free cash flow
Question
When you compute free cash flow, does the amount of long-term debt a firm carries enter the calculation?
Short answer
Not for unlevered (firm) free cash flow; yes, indirectly, for equity free cash flow. Free cash flow to the firm is EBIT after tax plus depreciation minus capex and working-capital investment, independent of financing, and debt enters through the discount rate (WACC). Free cash flow to equity subtracts after-tax interest and adds net new borrowing, so changes in debt and the interest it generates matter there, but the debt stock itself is never a cash flow.
Adapted from Crack, Heard on the Street, Q5.4.22, p.54; question and answer rewritten by SelfMadeQuant.com.
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