Which formula represents Levered Free Cash Flow (LFCF)?

Which formula represents Levered Free Cash Flow (LFCF)?

• A. Net Income + D&A - Capex - Change in NWC - Debt Principal Payment
• B. Net Income - Taxes - Interest
• C. EBITDA - Taxes - Interest
• D. FCF = UFCF - Debt Payments

Answer: (A)

Levered free cash flow is the cash left for equity holders after all obligations to debt have been met. To get there from net income, add back non-cash charges (depreciation and amortization) because they reduced net income without consuming cash. Then subtract cash outflows for capital expenditures and for changes in working capital since these reduce cash available from operations. Finally, subtract debt principal payments, which are cash sent to creditors to reduce the debt. This sequence directly reflects cash generated after servicing debt and after necessary reinvestment and working-capital needs, giving the amount available to equity holders. Other formulas don’t capture this cash-after-debt-service perspective as cleanly. Using EBITDA ignores taxes and interest, so it doesn’t reflect cash after debt costs. Starting from net income but omitting non-cash addbacks and capex/NWC effects misses key cash-relevant adjustments. Expressing levered FCF as UFCF minus debt payments is a valid relational idea, but it’s less direct as a standalone formula for levered FCF and relies on how UFCF and debt payments are defined.

Levered free cash flow is the cash left for equity holders after all obligations to debt have been met. To get there from net income, add back non-cash charges (depreciation and amortization) because they reduced net income without consuming cash. Then subtract cash outflows for capital expenditures and for changes in working capital since these reduce cash available from operations. Finally, subtract debt principal payments, which are cash sent to creditors to reduce the debt. This sequence directly reflects cash generated after servicing debt and after necessary reinvestment and working-capital needs, giving the amount available to equity holders.

Other formulas don’t capture this cash-after-debt-service perspective as cleanly. Using EBITDA ignores taxes and interest, so it doesn’t reflect cash after debt costs. Starting from net income but omitting non-cash addbacks and capex/NWC effects misses key cash-relevant adjustments. Expressing levered FCF as UFCF minus debt payments is a valid relational idea, but it’s less direct as a standalone formula for levered FCF and relies on how UFCF and debt payments are defined.