If you use Levered Free Cash Flow, what value does it yield?

If you use Levered Free Cash Flow, what value does it yield?

• A. Equity Value
• B. Enterprise Value
• C. None of the above
• D. Both

Answer: (A)

Levered free cash flow is the cash that remains for shareholders after the company has met all its debt obligations, including interest and principal repayments. Because it reflects what is actually available to equity holders after the debt is serviced, valuing levered free cash flow involves discounting those cash flows at the cost of equity. The present value of levered free cash flow equals the equity value—the portion of the company's value attributable to shareholders. By contrast, unlevered free cash flow (free cash flow to the firm) represents cash available to all capital providers and is used to derive enterprise value when discounted at the weighted average cost of capital. So, levered free cash flow yields equity value.

Levered free cash flow is the cash that remains for shareholders after the company has met all its debt obligations, including interest and principal repayments. Because it reflects what is actually available to equity holders after the debt is serviced, valuing levered free cash flow involves discounting those cash flows at the cost of equity. The present value of levered free cash flow equals the equity value—the portion of the company's value attributable to shareholders. By contrast, unlevered free cash flow (free cash flow to the firm) represents cash available to all capital providers and is used to derive enterprise value when discounted at the weighted average cost of capital. So, levered free cash flow yields equity value.