Dictionary

Unlevered free cash flow

Cash flow available to all funders before any interest is paid, used in discounted cash flow models that value the whole enterprise rather than the equity.

Start from operating-income, tax it at the effective-tax-rate, add back non-cash-charges, subtract capex and the change-in-working-capital. Because interest never appears, the result is independent of how the company is financed.

This is the stream discounted at wacc in a standard discounted-cash-flow model. The result is enterprise value, from which net-debt is subtracted to reach equity value. Mixing levered cash flow with WACC is the most common modelling error.

Example: Northwind Tools has $120M of EBIT, taxed at 24% gives $91M, plus $75M of D&A, less $75M of capex and $21M of working capital build, leaves $70M of unlevered free cash flow.

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