Levered Free Cash Flow and the Levered DCF [SEE THE IMPORTANT NOTE BELOW THE VIDEO]

IMPORTANT NOTE: The video here has a calculation error with the Levered FCF numbers. Please go by the screenshots and written guide on this page and the Excel file provided here. These have all been corrected. Unfortunately, RUclips does not let us “replace” or “correct” the video, so we can’t fix this issue without deleting and re-uploading the entire video and losing all the comments and data.
To get all the files and resources and a text version, please go to:
breakingintowallstreet.com/kb...

[@dungdungpolo]

your presentation is very good and polished. In other channels, sometimes the speaker uses lots of crutch words such as "right?", "you know", "hmm/aahh". So watching your tutorial is not only easy on the visual but also easy on the auditory

[@financialmodeling]

Thanks for your feedback!

[@financialmodeling]

For all the files and resources, please go to:
breakingintowallstreet.com/kb/valuation/levered-free-cash-flow/
IMPORTANT NOTE: The video here has a calculation error with the Levered FCF numbers. Please go by the screenshots and written guide on this page and the Excel file provided here. These have all been corrected. Unfortunately, RUclips does not let us “replace” or “correct” the video, so we can’t fix this issue without deleting and re-uploading the entire video and losing all the comments and data.

[@kidze31]

hi, should I add Stock based Compensation when I calculate Free Cash Flow for DCF valuation? Thank you.

[@financialmodeling]

No, never. It's a normal operating expense that creates dilution so is not the same as D&A / CapEx (simple timing difference). ruclips.net/video/djtA-tWcmtE/видео.html

[@benbutler31]

Is there any reason then to project a companies financing needs with a debt/equity schedule if you aren't including interest or debt repayments in DCF? Also, if a company is funding operations with debt and therefore you are including this in revenue growth but not including the associated costs with this growth (interest, increase of net debt etc.), would this not overstate the value?

[@financialmodeling]

No, not really, unless you are building a model specifically to make a debt vs. equity fundraising decision for the company. Debt funding will still factor into an Unlevered DCF because more Debt means higher bankruptcy risk which means a higher Cost of Equity... so WACC should increase over time if the company starts to use more Debt in its capital structure.

[@lukecaballero2725]

I have a dumb question, why are removing the impact of net interest expense (instead of the interest paid for the period similar to adding the impact of net borrowings for the period (Cash flow item)?

[@financialmodeling]

I'm not sure I understand your question. Unlevered FCF always removes the impact of net interest expense and anything else related to the company's capital structure.

[@naeembakht7157]

For the discount period, would you recommend using mid-year discounting

[@financialmodeling]

It doesn't make a big difference in most cases, but you can if you want.

[@johnnyies]

What are the filings you use to find the sell-side M&A transaction slides?

[@financialmodeling]

Search the sec.gov site for common keywords in Google Image Search

[@johnnyies]

@@financialmodeling Thanks! Are companies always required to post the slides after a deal?

[@financialmodeling]

@@johnnyies No. You will find it for some but not others, and there isn't much of a pattern to it. You can sometimes find more by searching via the SEC filings instead, but that is less efficient.

[@Cynthia-hl2kw]

This might be a stupid q, but could you explain on what financial bridges are in this case please?

[@financialmodeling]

The "bridge" is the set of items that lets you move between Equity Value and Enterprise Value. Please see the coverage of those topics here and the example of how to calculate Enterprise Value.

[@volumelow]

Isn't Levered DCF the go-to valuation tool on the buyside? Esp in real asset investments

[@financialmodeling]

No. You will sometimes see the Levered DCF used for certain REITs and some oil/gas midstream companies (MLPs). Outside of those cases, it's quite rare. It's a bit more feasible to use it when valuing properties rather than normal companies due to differences in how property-level debt works, but it still doesn't offer any real advantage over the Unlevered DCF.

[@volumelow]

@@financialmodeling Thanks for the feedback. Just a quick follow-up, what about PE infrastructure projects like dams and toll roads?

[@financialmodeling]

@@volumelow Again, you "could" always use a Levered DCF, but it presents few, if any, advantages over an Unlevered DCF. Levered FCF in this context is required to calculate the equity IRR to the PE firms, but IRR is a separate question from valuation.

[@ChaceBonanno]

This seems ridiculous to me. You are evaluating the company from perspective of purchasing the shares, not the bonds. As a shareholder of equity, wouldn’t you be more concerned with the fcfe than the fcff? If I wholly owned a business, I’d surely care about the fcf I receive after the costs of debt, not prior.

[@financialmodeling]

FCFE is more useful for assessing what you can actually *earn* from the business on an ongoing basis, especially if you are the operator. However, for valuation purposes, FCFF is still a more reliable metric for the reasons outlined here (also, any buyer of the business will consider all the investors in the business in the sale - not just common shareholders - which is why Enterprise Value-based metrics and methodologies are more relevant in this context).