Do you use Unlevered or Levered for DCF?
Also what is Free Cash Flow? Is that what you have left after all expenses have been paid for? and is it available to only equity investors or all investors? I have an interview tomorrow so want to just make sure O_O.
Free cash flow is Cash Flow From Operations- Capital Expenditures, equal to cash the firm has generated from operating after all capex (property plant equipment etc.) has been paid for. This is available to only equity investors because this is cash the company has available to pay out dividends or repurchase stock. Debt investors are mostly paid out already in interest expense on the income statement, which flows into CFFO in Free cash flow
So basically Free Cash Flow is the money left over after Capital Expenditures have been paid for?
You use unlevered FCF for DCF. This removes the effect of differing capital structures among firms. Formula is as follows:
EBIT * (1 - marginal tax rate) - CAPEX + D+A - an increase in NWC = unlevered FCF
You add D&A as they are non-cash expenses, and you minus an increase in NWC (increase in NWC is when current assets > current liabilities) as this represents a use of cash. A deduction in NWC is added to the formula as it is a source of cash.
Good luck with your interview
Oh, you’re not ready
Unlevered Free Cash Flow (UFCF) or Free Cash Flow to Firm (FCFF) is cash flow to all investors (NOPAT + D/A + Non-Cash Adjustments + Change in WC - CapEx)
Levered Free Cash Flow (LFCF) is cash flow available to only equity investors (CFO - CapEx - Mandatory Debt Repayments)
Free Cash Flow (FCF) is similar to above and pairs with equity value (CFO - CapEx).
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