When would you use levered FCF when valuing a company using the DCF method?

You should use the levered FCF approach when valuing a company using the DCF method when:

1. You are more interested in valuing the equity component.
2. You believe that their capital structure is relatively stable; and
3. You have information on debt and interest expenses.

You are directly valuing the equity when you are discounting levered cash flows with the cost of equity. However, it is still important to know details on debt, interest expenses, and income so you can arrive at the levered cash flows.

The stability of the capital structure is essential because the capital structure impacts the discount rates. If the capital structure is changing, the discount rates must also be changed each year. So, this method is usually preferred when the capital structure is quite stable.

Please also read when you would prefer to use the unlevered cash flows in valuing the firm using a DCF method.