Forecast FCF are unlevered; which term describes this?

Forecast FCF are unlevered; which term describes this?

• A. Levered cash flows
• B. Free cash flow to equity
• C. Unlevered cash flows
• D. Dividend cash flows

Answer: (C)

Forecasts that exclude financing effects describe cash flows available to all providers of capital, before interest and debt repayments. This is called unlevered cash flows. They reflect operating profitability after taxes and non-cash charges, but before financing choices, which is why they’re used for enterprise valuation with the discount rate that reflects the whole firm (the WACC). In contrast, levered cash flows are after debt service (interest and principal payments) and represent cash flow to equity. Free cash flow to equity is the levered version focused on equity holders. Dividend cash flows are actual distributions to shareholders, not the broad, pre-financing measure used in enterprise valuation.

Forecasts that exclude financing effects describe cash flows available to all providers of capital, before interest and debt repayments. This is called unlevered cash flows. They reflect operating profitability after taxes and non-cash charges, but before financing choices, which is why they’re used for enterprise valuation with the discount rate that reflects the whole firm (the WACC).

In contrast, levered cash flows are after debt service (interest and principal payments) and represent cash flow to equity. Free cash flow to equity is the levered version focused on equity holders. Dividend cash flows are actual distributions to shareholders, not the broad, pre-financing measure used in enterprise valuation.