Why FCFF = unlevered free cash flow?
levered beta contains the risk related to equity holder and debt holder
Similarly, FCFF is the one considering both equity and debt.
But why:
FCFE = levered free cash flow.
FCFF = unlevered free cash flow.
Seems contradictory.
Simple answer: Beta is only used in CAPM --> cost of equity, not in cost of debt. Its the regression of the equity value of a company and the total equity market. The debt factor is just to incorporate the gearing --> higher gearing = riskier because higher chance of default with possible 0 return for equity holder.
Sorry, I might not get it. Just ignore the beta in CAPM. FCFF, literally, is free cash flow for firm. I think it implies the cash flow is both equity and debt related. If so, isn't it levered cash flow? Thanks a lot!
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