Why FCFF = unlevered free cash flow?

Kevin ZH's picture
Kevin ZH - Certified Professional
Rank: Monkey | banana points 58

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.

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Comments (3)

Jan 8, 2019

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.

    • 1
Jan 14, 2019

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!

Jan 14, 2019