Why do you use unlevered free cash flow in a DCF and how do you calculate it?
Model answer
Unlevered FCF excludes financing effects, so it's available to all capital providers and pairs with WACC and enterprise value. Calc: EBIT x (1 - tax rate) + D&A - capex - increase in net working capital. Start from EBIT, not net income, to strip out interest.
⚠ Common wrong answer: "Start from net income, add back D&A, then subtract capex and working-capital increases." Why it fails: Net income already has interest expense in it, so the cash flow is contaminated by capital structure — and the tax shield gets double-counted once you discount at WACC. Start from EBIT and tax it at the marginal rate.
This is one of the 20 free cards. Sign up free for 10 reps a day from the full bank.
More from DCF & WACC
- Walk me through a DCF.
- What is WACC and how do you calculate it?
- What are the two ways to calculate terminal value, and how do they differ?
- What discount rate do you use if you're discounting levered free cash flow?
- Two identical companies, one has more debt. Which has the higher WACC?
- A DCF gives a value that seems too high. Which assumptions would you check first?
Try the real thing
1 / 3What is a leveraged buyout?
Superday coming up? Take the cheat sheet.
The technicals and stories to have cold before you walk in — free, one email, no mailing list.
Free tier: 20 cards + 10 daily reps + ALL drills — no credit card required.