When building a DCF model, the type of cash flow you use matters. In this chapter, we shift our focus to a specific metric: Unlevered Free Cash Flow (UFCF).

This makes it different from Levered Free Cash Flow (LFCF): the actual cash available to equity holders after interest and debt payments.

If you use UFCF in a DCF model, your final valuation gives the Enterprise Value (the value of the whole company, including both debt and equity).

Why Use UFCF in DCF?

Using UFCF standardizes the valuation across businesses, regardless of their capital structure. It's especially helpful when:

• Comparing companies with different debt levels;

• Evaluating the company's operations, not its financing decisions;

• Estimating value as a potential acquirer (who may change the financing mix).

Here's a high-level way to calculate UFCF:

$\text{UFCF} = \text{EBIT} \times (1 - \text{Tax Rate}) + \text{Depreciation \& Amortization} - \text{CapEx} - \Delta \text{Working Capital}$

Where:

• EBIT - Earnings Before Interest and Taxes;

• CapEx - Capital Expenditures;

• Change in Working Capital - Current Assets minus Current Liabilities change over time.