Module I· Cash Flow Statement ConstructionIntermediate
Question
What is levered FCF vs. unlevered FCF — and when do you use each?
Answer
Mechanics
Unlevered FCF (FCFF / FCF to firm): cash for ALL capital providers (equity + debt).
Calculation
EBIT × (1−t) + D&A − Capex − Δ NWC. NO interest effect, NO debt repayment.
Application
the standard DCF valuation of enterprise value, discounted at WACC. Levered FCF (FCFE / FCF to equity): cash ONLY for equity holders, after all debt obligations.
Calculation
OCF − Capex + Net Borrowing (= raises − repayments). Application:
- Equity DCF / DDM for banks/insurers (where WACC is poorly defined).
- LBO models for cash sweep / debt repayment.
- Dividend-capacity analysis.
Rule of thumb
95% of IB DCFs use FCFF; FCFE stays for special cases.
Deep diveShow more details
Pitch tip
If a senior asks 'which FCF is in your DCF?' — FCFF with WACC, always. An FCFE DCF is an equity-research pattern, rare in IB.