Interview Technical Question
Hi fellow monkeys, I was stuck on an interview question today.
As an investor, would you rather have $1 increase in EBITDA or Unlevered Free Cash Flow?
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The questions are testing your understanding of EBITDA, levered fcf and unlevered fcf. For the sake of your development, google the three terms and then come back to me with an answer.
hardo
Not being a hardo. There's no benefit to memorizing the answer to a question, especially since this one is pretty easy.
If you're getting banking interviews, and can't figure out this question on your own with access to google, you have a lot to catch up on on the technical front.
FCF because EBITDA is only a proxy for FCF. For DCF, LBO, you care about FCF for a derived value.
wouldn’t it be fcf because ebitda is an input for fcf? in addition, an investor would much rather have a company be able to generate more cash than just increase earnings before deducting all of the expenses
Generally answer would be UFCF, but if the multiple (think DCF exit multiple method for Terminal value) is super-high, increase in EBITDA could derive higher value. So it really depends on circumstances.
unlevered
You can also look at this mechanically. Try getting from EBITDA to FCFF.
Increasing EBITDA by $1 is only an increase in FCF by 1*(1-t), asuming everything else stays equal. So, assuming t=21%, then EBITDA's effect on FCFF is only $0.79. Therefore, any $1 increase in EBITDA will yield a smaller change to FCFF than if you had just increased FCFF by $1.
This
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