![]() The reason for this discrepancy is because banks and insurance companies take-in liabilities such as consumer deposits and insurance premiums which are separate from the financing situation of the firm as a whole. This is in contrast to “regular” companies, where you use FCFF in a DCF model (most people simplify FCFF by just calling it FCF). McKinsey & Company, in their Valuation textbook, suggests using FCFE/ levered free cash flow in order to estimate the valuation of financial firms such as banks and insurance companies. Used to value the entire firm with a WACC as the discount rate (stockholders, bondholders, and preferred stockholders, if applicable).The value of the entire firm (or enterprise).FCFF = Free Cash Flow to Firm = Unlevered Free Cash Flow (UFCF).Used to value equity with a Cost of Equity discount rate (only if there are no bondholders and/or preferred shareholders).The value of a company if all debt was paid off.FCFE = Free Cash Flow to Equity = Levered Free Cash Flow (LFCF).Note the following definitions so you don’t get these FCF terms mixed up for your DCFs. Defining LFCF and FCFE UFCF and FCFFĪlso, note that levered free cash flow is also sometimes called FCFE (free cash flow to equity). The key to the equation is that this cash is the cash left over after paying all debt obligations have been paid (for the fiscal year). To define what levered free cash flow is, it is simply the amount of cash available for either (A) redistribution to shareholders, or (B) to reinvest back into the business. ![]() How to Find Levered FCF Flow in a 10-k.Levered Free Cash Flow vs Unlevered FCF DCF Implications for Both.Defining the Levered Free Cash Flow Formula.The way that we will come to these answers will be through the following sections: These are the questions I will be answering in this post. But should levered free cash flow (also called FCFE) be used in a DCF? How does leverage affect a DCF, and future cash flows, and the value of a company? Free cash flow and a DCF go hand-in-hand in estimating valuation. ![]()
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