Free Cash Flow (FCF) is defined as the amount of cash a firm has after the cost of its operations and spending on capital. Free cash flow comes in 2 forms, levered and unlevered:

  • Levered Free Cash Flow : Cash Flow From Operations – Capital Expenditures + Interest Income & Expense
  • Unlevered Free Cash Flow : Cash Flow From Operations – Capital Expenditures

Free Cash Flow is extremely useful in LBO modeling as it shows how much cash the company will have to pay off the debt used to finance the buyout. Unlevered FCF is the more commonly used of the 2.

Free Cash Flow shows the amount of money which a firm is able to generate after taking into account asset expenditures. FCF is essential in order to increase the value of a firm, as without cash a firm is unable to innovate, pay off debt or perform takeovers.

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