So, I'm having trouble understanding a concept, and I thought maybe someone can help me out. It has to deal with unlevered/levered FCF. So here it is:
So, from what I understand, when it says unlevered FCF, it means stripped of debt. And when its levered, it takes into account the capital structure of the company & includes debt.
Now, when projecting FCF, (EBIT(1-T) + D&A - CapEx - NWC)), why does this give you Unlevered FCF? Is it because it's before interest and doesn't take into account debt?
And when you look at multiples with FCF, why would you use Enterprise Value with Unlevered FCF and equity value with Levered FCF? From the M&I Guide, it's saying because Levered FCF already takes into account of interest and therefore the money is only available for equity shareholders. I guess I'm not seeing the whole picture and need to see it mathematically. Can someone please explain this to me in a better way?
And what the hell does a Levered FCF look like anyway? Sorry for the long post. And thanks for your help for whoever answers.
I'm confused about what you're confused about...your question already has the explanation in it...
Use free cash flow to the firm FCF (which means cash flow available to all capital providers) with the enterprise value (which includes debt and market value of equity).
FCF to the firm (unlevered):
EBIT or Operating Income x (1-T) + D&A - CapEx +/- change in working capital
Use free cash flow to equity with the equity value of the firm (this is cash flow that's only available to the common shareholders, after the debt providers were taken care of or if the firm has no debt). For this FCF calc you start with the bottom line/net income.
FCF to equity (levered):
Net income + D&A - CapEx +/- change in working capital
Note the difference, FCFF starts with EBIT, FCFE starts with net income.
Flake, I think you got levered and unlevered mixed up when labeling the two before giving the respective equations
Sorry about that, did it on my phone. Solidarity's post is better anyway.
Yeah, I think you got them reversed. But thanks a lot guys, I just took some time to write/think it out. Finally got my mind to soak it in and understand it. Thanks again! Hopefully someone will come across this and learn a thing or two from it.
You start with EBIT and take out taxes, so you don't account for interest payments or mandatory repayment of debt.
Yup
Using UFCF to calculate terminal value yields EV because it's the cash flow available for all tranches of the capital structure (equity, preferred, converts, debt, etc). Therefore, the terminal value you're calculating is the value of the entire company (the enterprise), and not just the value of the equity.
Levered FCF is the remaining capital for distribution to EQUITY HOLDERS after interest payments and mandatory debt repayment, meaning that at the end of the year, the company could theoretically issue all of its LFCF as a cash dividend. Therefore, the terminal value reflects only those "dividends" available to equity holders. It's used extensively in bank and FIG valuation.
Google
How the hell did you type all of that on your phone??!?
And thanks Solidarity btw
A firm is funded by equity and debt FCFFirm = FCFEquity + Debt cash flow Therefore EnterpriseValue(obtained by discounting FCFF with the WACC) = EquityValue(obtained by discounting the FCFE with the cost of equity Ke) + Market Value of Debt
You might want to add the value of non operating assets in there.
Get the Investment Banking book by Pearl and Rosenbaum.
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