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My understanding is that unlevered cash flows are used because the "underlying value" of the company should be based on its operations and not by its capital structure. This is the fundamental "value" of a company.
That said, value doesn't equal purchase price. As you mentioned from a returns perspective, the capital structure does impact the returns and probably should be taken into account.
Note: I come from a debt background and have limited professional experience in equities.
Hope this helps - interested in hearing other views.
Or maybe its to determine the total debt capacity of the distressed company - assuming that the existing debt will be refinanced upon closing.
If you're looking at a distressed company that is on ur verge of going through bankruptcy, you look at unlevered FCF's to determine intrinsic value. Another reason why debt/interest expense is not baked in, is because the company will have a fresh capital structure post-reorg (pre-petition debt holders will recieve equity).
Also, the other posters above me made comments that didn't really make any sense so don't know what they are talking about.
Now if you are looking at returns model (e.g. LBO), we use levered FCF's because returns will be driven by equity value appreciation via debt pay down.
You just regurgitated my post, then accused me to not making any sense.
great!! thanks for this.
I didn't regurg ur post, buddy. Your explanation wasn't that clear. If it was, I wouldn't have bothered to reply.
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