Which expression represents levered Free Cash Flow?

Which expression represents levered Free Cash Flow?

• A. EBIT*(1 - tax) + D&A - CapEx
• B. Net Income + D&A - Change in Working Capital
• C. Cash Flow from Operations - CapEx - Taxes on Interest
• D. Cash Flow from Operations - CapEx - Mandatory debt payments

Answer: (D)

Levered Free Cash Flow is the cash available to equity holders after the company has covered operating cash needs, funded ongoing capital investments, and met debt obligations. Start with Cash Flow from Operations to capture the cash generated by the core business. Then subtract Capital Expenditures to reflect the cash reinvested in maintaining or expanding the asset base. Finally, subtract mandatory debt payments (principal repayments) to account for the cash that must leave the company to service debt. What remains is the cash flow available to shareholders, i.e., levered FCF. The other expressions miss one or more of these pieces: they either use a different starting point and omit debt service, or they subtract items that don’t represent debt principal payments (like taxes on interest), or they omit CapEx entirely. The form with CFO minus CapEx minus mandatory debt payments aligns with levered Free Cash Flow.

Levered Free Cash Flow is the cash available to equity holders after the company has covered operating cash needs, funded ongoing capital investments, and met debt obligations. Start with Cash Flow from Operations to capture the cash generated by the core business. Then subtract Capital Expenditures to reflect the cash reinvested in maintaining or expanding the asset base. Finally, subtract mandatory debt payments (principal repayments) to account for the cash that must leave the company to service debt. What remains is the cash flow available to shareholders, i.e., levered FCF.

The other expressions miss one or more of these pieces: they either use a different starting point and omit debt service, or they subtract items that don’t represent debt principal payments (like taxes on interest), or they omit CapEx entirely. The form with CFO minus CapEx minus mandatory debt payments aligns with levered Free Cash Flow.