CF in DCF vs LBO
What is the difference between the DCF and the LBO in the cash flow calculation? With the DCF, you calculate the FCFF and assume that the company is fully financed by equity. What cash flow is calculated for the LBO?
You should take a course or something / watch YouTube / ask juniors and seniors at school
LBO uses cash available for debt service (CFADS) and pays mandatory amortization and other fixed obligations then sweeps cash into revolver and repayable debt, usually the first lien term loan B.
The key difference between a DCF’s FCF is the impact of interest expense (and the tax impact)
I'd second the comment about taking a course - the mechanical difference between the cash flows are relatively simple, but what is more important is that you understand the difference between these methods, what they mean, and when you'd use them (which is a lot of explaining). The big picture answer is that the cash flows in a DCF are the cash flows available to all asset owners of the firm, while in an LBO model the resulting cash flows are those available to equity-holders after satisfying debt obligations. Even this though is a big simpification.
Do I understand correctly that the FCFF (unlevered FCF) is used in the DCF or, in other words, the cash flow without taking the capital structure into account?
In the LBO, the FCFE (levered FCF) is then used to calculate how much of the cash flow the equity holders actually receive after satisfying the claims of all investors.
It’s a bit more nuanced but simply put yes, an unlevered DCF shows all cash flows and the LBO shows cash flows on a levered basis, taking into account interest expense and the subsequent tax impact.
When you say satisfying the claims of the investors, what you really mean to say is servicing their outstanding debt obligations to lenders.
Bit of a misleading explanation since you can also perform a DCF on a levered FCF basis, which is the same as an LBO (assuming you make new assumptions about debt on a go-forward basis, similar to how an LBO wipes out cap structure at the beginning). Also, levered FCF basis DCF also includes tax impact, just not interest impact since it's debt-neutral (i.e. ignores debt impact), but recognizes tax impact on everything else.
Additionally, a DCF based on FCFF isn't "without taking" capital structure into account, but rather taking all of the capital structure into account (maybe nitpicky semantics, but wanted to include).
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