You can use the levered or unlevered free cash flow to value a company using the DCF method of valuation. However, there are different situations when you prefer one over the other. This article discusses three specific instances when you can use the levered free cash flow instead of the unlevered free cash flow when valuing a company using the DCF method.
You can use the levered or unlevered free cash flow to value a company using the DCF method of valuation. However, there are different situations when you prefer one over the other. This article discusses three specific instances when you should use the unlevered free cash flow instead of the levered free cash flow when valuing a company using the DCF method.
Why/When do you use unlevered FCF when valuing a company using the DCF method?
Valuation using multiples is a popular and frequently used valuation method. We address if valuation using multiples is based on sound corporate finance principles in this article. While valuation using multiples is a popular and frequently used valuation method, it is also misused and incorrectly applied frequently! We address the misuse or incorrect application of valuation using multiples in another article and only address the technique’s underlying corporate finance principles here.
There are three methods that are used in valuation: DCF, multiples and, options-based method. Each one has its pros and costs. However, the DCF method is the most used in valuation in the classroom. In this article, we address the question “Why is the DCF valuation method the most used method in valuation?”
(Note: we acknowledge that there is a debate on the most used valuation technique in practice vs. in the classroom. The multiples method maybe more frequently applied in practice as it is far simpler!)