So my understanding is that unlevered free cash flow excludes Interest income/expense because it's the cash flow available to all investor groups while levered free cash flow includes them as it's only the cash flow to equity investors.
Here's what I'm confused about - why do you exclude interest income? Say you have made some investment with cash and get 5% interest income - this is nothing to do with your capital structure right? Shouldn't you just exclude interest expense I.e money paid to debt investors?
Someone please help me out here
Because the cash you used for the investment is financed by a source of financing which you find at the liability side of the balance sheet: equity or debt.
In a DCF you value the core business. Investments such as a loan to a third party should be excluded from this (non-core to operation) and valued seperatly and included in your EV to equity bridge. If you have a boring infrastructure company (super low WACC) which has a venture capital investment on its balance sheet (potentially super high WACC), you cannot apply 1 WACC to the combination of both.
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