Unlevered Free Cash Flow (UFCF)
Definition
Unlevered free cash flow is the cash flow available to ALL capital providers (debt and equity), computed before any interest expense. The standard formula: UFCF = EBIT x (1 − tax rate) + D&A − capex − increase in net working capital. EBIT x (1 − t) is called NOPAT (net operating profit after tax).
Because it excludes financing effects, UFCF is independent of capital structure, which makes companies comparable and is why it is the standard cash flow in a DCF. Discounting UFCF at WACC yields enterprise value.
Note the tax subtlety: taxes are computed on EBIT (as if the company had no debt), so UFCF deliberately ignores the interest tax shield — that benefit is instead captured in WACC through the after-tax cost of debt.
Why interviewers ask
"Walk me through unlevered free cash flow" is a guaranteed DCF question. Traps: taxing EBITDA instead of EBIT, forgetting to add back D&A after taxing EBIT, subtracting interest (which would make it levered), and double-counting the tax shield by both deducting interest and using after-tax cost of debt in WACC.
Related terms
Interviews don't test definitions — they test recall under pressure.
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